Quebec AMF revisits proposal for "hedger" certification and proposes counterparty "hedger" identification requirement

On February 1, 2017, the Autorité des marchés financiers (AMF), Quebec’s financial markets regulator, published proposed amendments to the Derivatives Regulation  the Proposed Amendments made under the Derivatives Act (Quebec) (QDA).  The proposals are open  for comments for a period of 30 days to March 4, 2017. 

The Proposed Amendments include a new requirement that  an “accredited counterparty” which engages in an OTC derivatives transaction with a hedger who does not otherwise qualify as an “accredited counterparty” provide prescribed identification information on the hedger to the AMF within 30 days after the end of the quarter in which the transaction was completed.

The prescribed information which the “accredited counterparty” would be required to deliver electronically to the AMF includes the following:

  • the unique legal entity identifiers (LEI) assigned to the accredited counterparty and the hedger in accordance with the standards set by the Global Legal Entity Identifier System as defined Regulation 91-507 respecting Trade Repositories and Derivatives Data Reporting (Regulation 91-507);
  • if the hedger is an individual or is not eligible to receive an LEI, the name and address of the hedger as well as the alternate identifier used by the accredited counterparty to identify the hedger as contemplated in that situation under section 28(4) of Regulation 91-507; and
  • the unique transaction identifier (UTI) assigned to the transaction by the trade repository in accordance with section 29 of Regulation 91-507.

In its notice to the proposal, the AMF states that delivery of this information will enable the regulator to “determine the identity and number of hedgers in order to assess their status as accredited counterparties”.

This hedger identification requirement replaces the AMF’s earlier proposal issued in January 2016 which would have imposed certification and related recordkeeping requirements on the hedger itself.  The hedger certification proposal elicited industry comments regarding documentary, compliance and operational issues that proposal would have raised for bank and non-bank counterparties. 

The AMF has sought to address these issues under the new hedger identification mechanism by leveraging information that is already required for OTC derivatives trades that are reportable under Regulation 91-507. Arguably, the AMF already has the required information, or access to it, through the derivatives trade reporting process.  Given the existing harmonized data fields for reporting under Regulation 91-507, what appears to be missing is the ability for the AMF to use the LEI and UTI information to isolate data on pure “hedgers”.   The comment process will be an opportunity for trade repositories and sell-side counterparties to offer up industry solutions to address what the AMF clearly views as a market protection issue.  The concern is that the imposition of a Quebec-specific reporting procedure could create an incentive for banks and other derivatives dealers to terminate existing arrangements with “hedgers” in the Quebec market, an outcome which might paradoxically increase rather than decrease the risk exposure of this category of market participants.

The hedger identification requirement is not expressly limited to transactions which are reportable under Regulation 91-507 but would extend to any OTC derivatives transaction that an “accredited counterparty” enters into with a hedger that does not qualify under any other category of the definition of “accredited counterparty”.   Clarification that the new hedger identification requirement would similarly not apply to contracts and instruments such as gaming contracts, insurance and annuity contracts, prescribed currency exchange contracts, physically-settled commodity contracts and certain types of consumer and commercial contracts that are specifically excluded under Regulation 91-506 respecting derivatives determination would be also helpful.

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