Notice issued to help interpret product determination and trade reporting rules in Canadian jurisdictions governed by MI 96-101
On September 29, 2016, the securities regulators of Alberta, British Columbia, New Brunswick, Newfoundland & Labrador, Northwest Territories, Nova Scotia, Nunavut, Prince Edward Island, Saskatchewan and Yukon (the Participating Jurisdictions) published CSA Multilateral Staff Notice 91-305. This Notice answers specific questions about how certain aspects of the product determination and trade reporting rules (and related companion policies) should be interpreted.
The Notice will be a useful reference for those who haven’t already spent a lot of time considering the rules. However, while it provides useful clarification on a number of points, it isn’t a substitute for a close reading of the rules, which (as always) are full of nuances and subtleties that can significantly influence the analysis of a real-world fact situation.
With that little “disclaimer” out of the way, let’s look more closely at some of the highlights of the Notice:
(i) Expectations on a non-reporting counterparty that discovers error or omission in data reported and how a non-reporting can verify the accuracy of data reported
A non-reporting counterparty to a trade does not have an obligation to verify the accuracy of the information reported by the reporting counterparty. However, if there is a circumstance where the non-reporting counterparty discovers that there is an error or omission in the data reported, the Notice provides that the non-reporting counterparty is required to notify the reporting counterparty of such error and then the reporting counterparty has the responsibility for correcting that error or omission.
The Notice suggests that if a non-reporting counterparty would like to identify reporting errors (again there is no positive obligation on the non-reporting counterparty to do so; however, reporting counterparties in order to comply with their own obligations may wish to encourage them to do so) may review the data that has been reported to a recognized trade repository (the Chicago Mercantile Exchange Inc., DTCC Data Repository (U.S.) LLC and Ice Trade Vault, LLC). The trade repositories are required to provide access to the data reported free of charge. The relevant contact details for the trade repositories are set out in the Notice.
(ii) Unless exemption available, compliance with LEI requirements is necessary, otherwise reporting counterparty would be in breach of the trade reporting rule
All local counterparties that are eligible to obtain a Legal Entity Identifier (LEI) must have an LEI prior to transacting in a reportable derivative.
If a counterparty is an individual or is not eligible to receive an LEI, the reporting counterparty must identify that party by a single alternative identifier when providing the report to the trade repository. The Participating Jurisdictions have issued relief in the form of Blanket Order 96-501 Relief from Certain Derivatives Reporting Requirements. Unless an exemption is available (and the relief provided for is limited because it is only intended to address situations where foreign laws prevent or hinder reporting, and situations where the reporting counterparty to a derivative has been unable to obtain certain information from its counterparty to enable the reporting counterparty to fulfil its reporting obligations under the trade reporting rule), if a reporting counterparty does not provide an LEI for the other counterparty it will be considered to be in breach of the trade reporting rule.
The securities regulators indicate that they will continue to monitor the developments related to the use of LEIs and may consider whether further relief, additional requirements or restrictions on trading are warranted.
(iii) Derivatives trades that existed before the trade reporting rules took effect and have expired or terminated prior to a specified date do not need to be reported
The Notice clarifies that for derivatives dealers and clearing agencies, transactions that were entered into prior to July 29, 2016 that have not expired or terminated (i.e., remain open/outstanding positions) as of December 1, 2016 must be reported by that date. For all other counterparties, derivatives transactions that were entered into before November 1, 2016 and have not expired or terminated as of February 1, 2017 must be reported by that date.
Derivatives trades that existed before the trade reporting rules took effect and have expired or terminated prior the foregoing dates do not need to be reported.
(iv) Reaffirms that, to be considered a “spot” contract, settlement must occur within two days
For those of you who have spent time analyzing whether an FX derivative is a FX spot under the rule, you’re aware that the customary timeline for settling a “spot FX contract” in the relevant spot market depending on the currencies involved might be longer than the two-day limit imposed by the securities regulators. Unlike the position taken by the CFTC in the U.S., which recognizes that in certain circumstances FX transactions may have a longer settlement period, the Notice suggests that other than for securities conversion transactions, that the two-day settlement period remains a “bright line test” under MI 96-101.
The Notice also provides a list of contacts at the securities regulatory authorities in each of the Participating Jurisdictions, to whom questions about the Notice may be directed.
 In nine of the ten Participating Jurisdictions, trade reporting began on July 29, 2016 for clearing agencies and derivatives dealers and will begin on November 1, 2016 for all other reporting counterparties. The exception is Newfoundland & Labrador, where it is anticipated the reporting obligations will begin for all reporting counterparties on November 1, 2016.