OSC, AMF and MSC propose relief to end users from trade reporting for certain inter-affiliate trades

The Ontario Securities Commission, the Autorité des marchés financiers and the Manitoba Securities Commission have announced that “end users” will not be required to comply with derivatives trade reporting requirements in respect of trades between an end user and an affiliate in certain circumstances. An “end user” is essentially a reporting counterparty that is not a derivatives dealer, a clearing agency, or, in Quebec and Manitoba, a Canadian financial institution.

End users are subject to the trade reporting obligation as of June 30, 2015 under local trade reporting rules adopted in these three provinces. However, the AMF and the MSC have granted temporary relief for end users in respect of certain inter-affiliate trades pending codification of this relief in their respective local rules. The OSC has indicated in its staff notice that it intends to propose amendments to the local Ontario trade reporting rule to provide similar relief.

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"No sale": B.C. court holds that a purported acquisition of scrap metal was in substance a financing deal rather than a true sale

Andrew Cunningham -

A recent British Columbia Supreme Court case took a fresh look at the old question of how to tell a true sale from a financing or loan transaction. The ruling in Coutinho & Ferrostaal GmbH v. Tracomex (Canada) Ltd. is a welcome addition to the relatively sparse body of case law on this topic, as it reaffirms and applies a number of the principles set out in the 2003 Ontario decision in Metropolitan Toronto Police Widows and Orphans Fund v. BC Tel Communications Inc. (Widows and Orphans).

The facts of Coutinho are too complicated (and, truthfully, too boring) to recount in detail. Suffice it to say that various players in the scrap metal industry were interested in a stockpile of old railroad rails located just outside Vancouver. The dispute was ultimately about who owned the rails after a series of transactions had taken place among parties of various nationalities who, by the end, all seemed to be accusing one other of various forms of duplicity. The court eventually (and wisely) decided the ownership issue in favour of the plaintiff, Coutinho & Ferrostaal (C&F), which appears to have been the most innocent of the dramatis personae.

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Revisiting the "specified derivatives" rulebook for Canadian investment funds - an old idea whose time has come

Alix d'Anglejan-Chatillon  -

As previously reported, staff of the Ontario Securities Commission (OSC) has issued welcome guidance in the absence of clearly articulated restrictions on the re-hypothecation of collateral supporting specified derivatives transactions in portfolios of prospectus-qualified investment funds.  The guidance, however, also serves to highlight some of the challenges faced by portfolio managers, their counterparties and legal advisers when it comes to managing these derivatives portfolios on a basis that is both compliant with the very technical rulebook governing transactions in “specified derivatives” under National Instrument 81-102 Investment Funds (81-102) and consistent with standard market terms and practices in the broader OTC derivatives industry.

OTC derivatives markets reform is gradually taking shape in the major global derivatives markets.  As the contours of this new regulatory order begin to settle in the United States and Europe, the Canadian Securities Administrators (CSA) and federal regulators continue to piece together a made-in-Canada framework of rules that will mandate, among other changes, derivatives trade data reporting, central counterparty clearing, registration, trading and custody of OTC derivatives and enhanced custody and collateral requirements for non-cleared derivatives.  Here, as in other markets, these new ground rules are being specifically developed to address systemic, counterparty, liquidity, credit and other key risks in the Canadian and cross-border OTC derivatives market and to make that market more transparent, liquid and safe

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Yukon's Securities Transfer Act now in force

Yukon recently proclaimed the Securities Transfer Act and related amendments to the Personal Property Security Act (related to security interests in investment property) into force effective May 1, 2015 (Yukon Gazette, February 15, 2015). This leaves PEI as the only province or territory without a Securities Transfer Act or a perfection by control regime for investment property.

Quebec AMF to revoke derivatives blanket exemption decision effective September 5, 2015

Alix d'Anglejan-Chatillon -

The  Autorité des marchés financiers (AMF), Quebec's financial services regulator, issued an important decision yesterday which provides for the revocation effective September 5, 2015 of Decision No. 2009-PDG-0007 General Decision Respecting the Exemption from the Application of Sections 54, 56 and the First Paragraph of Section 82 of the Derivatives Act (the Blanket Decision).  The decision can be found beginning on page 413 of the April 30, 2015 Bulletin.

The AMF had issued the Blanket Decision on January 22, 2009 in conjunction with the enactment of the Quebec Derivatives Act (QDA) to provide transitional relief for transactions and other activities in relation to certain specified derivatives, subject to certain conditions. Canadian and foreign market participants which have relied on this exemption should review their current derivatives markets activities in Quebec and determine whether any other statutory relief may be available, whether there may be a basis to apply for focused discretionary relief under the QDA or whether any current client arrangements with Quebec counterparties should be discontinued by the September 5, 2015 deadline.

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Contracting with Corporate Class Funds (or a Sofa)

Margaret Grottenthaler -

Can your sofa enter into a contract? Of course not! Can a class of shares enter into a contract?  Of course not! Both your sofa and the shares are property, not persons. Only an entity with legal personality can enter into contracts. However, it isn’t unusual in the context of ISDA Agreements, for example, for fund managers to name a particular corporate class of shares as the counterparty. At times there isn’t even a clue in the agreement as to the name of the corporation that has issued the shares.

But if you are contracting with such an entity, make no mistake – your counterparty is the corporate entity. Practically speaking these fund structures work by allocating assets and liabilities on a class by class basis, with liabilities being allocated by including limited recourse provisions in material contracts. In other words, your counterparty is the corporation, but you (and others contracting with the corporation with respect to that fund) agree to limit recourse to the assets allocated to a particular class of shares. It is these limited recourse provisions that protect the shareholders of one class and creditors contracting with respect to that class from being exposed to the liabilities of the corporation contracted with respect to another class. Without them, that siloing does not exist.

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Yukon joins Cooperative Capital Markets Regulatory System

The Canadian Department of Finance announced yesterday that Yukon has now joined the Cooperative Capital Markets Regulatory System. The project now includes British Columbia, Ontario, Saskatchewan, New Brunswick, and Prince Edward Island, Yukon and the federal government.

The Department of Finance also announced the members of the nominating committee that will recommend candidates for the initial board of directors to the Capital Markets Regulatory Authority. Participating jurisdictions also intend to release updated consultation draft federal, provincial and territorial capital markets legislation and draft initial regulations this summer.

For more information on the proposed regime, see our posts on the infrastructure of the proposed new regime, the proposed provincial acts, and the effects of the proposals on derivatives regulation.

The Investment Funds Practitioner published for April 2015

The Investment Funds and Structured Products Branch of the Ontario Securities Commission today released the April 2015 issue of The Investment Funds Practitioner, which provides an overview of recent issues arising from applications for discretionary relief, prospectuses and continuous disclosure documents filed by investment funds.

In respect of prospectuses, the Practitioner discusses concerns with respect to dual class structures of flow-through limited partnerships. The Practitioner also discloses OSC Staff's expectation that redemptions by ETFs that offer periodic redemptions of their securities at a price determined with reference to the closing market price of those securities be capped at NAV and that disclosure regarding market price redemptions include a statement to that effect. Dealing with mutual funds specifically, concerns include setting the payment of distributions in the form of reinvested units or shares as the default option if securityholders do not specifically request distributions in cash. Further, the Practitioner discusses when additional prospectus disclosure may be requested of the offering expenses of split share companies, and concerns with disclosure in closed-end fund prospectuses that suggest the closed-end fund would be permitted to do certain activities that are now contrary to the amended NI 81-102.

The Practitioner also discusses issues with past performance presentation in Fund Facts and public inquiries in regards to the rehypothecation of collateral for OTC derivatives.

IIROC proposes adjusting margin requirements for agency lending agreements

The Investment Industry Regulatory Organization of Canada yesterday proposed amendments to Dealer Member Form 1 intended to address concerns that current rules do not set out specific margin requirements for agency cash and security borrowing and lending arrangements, as well as the fact that current rules do not have the same margin requirements for arrangements with acceptable counterparties versus regulated entity counterparties.

The concerns are especially relevant considering the recent trend involving dealers entering into borrowing and lending arrangements with custodians that act as agents for counterparties. According to IIROC, the risk of such agreements is equivalent to comparable "principal" arrangements. However, since Dealer Member Form 1 does not cover these types of agency agreements, dealers are currently required to provide additional margin in these cases. 

To address these concerns, the amendments are designed to ensure that agency arrangements are treated for margin purposes in the same way as equivalent principal arrangements between dealers and custodians. As such, the counterparty credit risk classification of the custodian would determine the level of margin required. Custodians that are active in the security borrowing and lending business are typically financial institutions that meet the definition of "acceptable institutions" and are considered low credit risk clients.

Proposals to amend the margin requirements were first published last year, and yesterday's release takes into account comments received from stakeholders. IIROC is accepting comments on its revised proposal until May 27, 2015. For more information, see IIROC Notice 15-0053.

CSA adopt amendments to short-term debt and short-term securitized products prospectus exemptions

Last week, the Canadian Securities Administrators released amendments to prospectus exemption rules relating to the short-term debt and short-term securitized products prospectus exemptions.

Ultimately the changes will, among other things, (i) change the requirements that short-term debt securities must satisfy in order to be distributed under the short-term debt prospectus exemption; (ii) make the short-term debt prospectus exemption unavailable for securitized products such as asset-backed commercial paper; and (iii) introduce a new short-term securitized products prospectus exemption. The new requirements for reliance on the amended short-term debt exemption include the imposition of a new “modified split rating condition”, which will require that, in addition to satisfying the rating threshold condition (that the short-term debt has at least one credit rating at or above the prescribed threshold), the short-term debt not have any rating that is below those prescribed.

As we've previously discussed, these focused changes in respect of short-term securitized products are a retreat from the more comprehensive proposals to establish a new framework for the regulation of securitized products proposed in 2011

Assuming Ministerial approvals, the changes will come into force on May 5, 2015. Notably, the CSA has also announced changes to the accredited investor and minimum amount investment prospectus exemptions.