Jacob A. Sadikman, Blair Wiley
Jan 22, 2015
Securities regulators in the provinces of Alberta, British Columbia, New Brunswick, Nova Scotia and Saskatchewan (collectively, the Participating Jurisdictions) have published for comment Proposed Multilateral Instrument 91-101 Derivatives: Product Determination (91-101), Proposed Multilateral Instrument 96-101 Trade Repositories and Derivatives Data Reporting (96-101) and related companion policies (collectively, the Proposed Reporting Rules). A link to the Proposed Reporting Rules is available here.
The Proposed Reporting Rules, once adopted, will require most over-the-counter (OTC) derivatives transactions involving a local counterparty in the Participating Jurisdictions to be reported to a recognized trade repository. The Proposed Reporting Rules will impact businesses in Western Canada and the Maritimes that buy, sell, store and transport physical and financial commodities, particularly upstream, midstream and downstream players in the oil and gas industry, electricity market participants and others involved in energy marketing and trading activities.
As described in a previous Osler Update, the provinces of Ontario, Québec and Manitoba implemented OTC derivative trade reporting rules on October 31, 2014. The Proposed Reporting Rules are modeled after the rules already implemented in Ontario, Québec and Manitoba, with a few notable differences, particularly for traders of commodity derivatives.
The remainder of this Osler Update briefly summarizes the Proposed Reporting Rules and identifies certain key differences between the Proposed Reporting Rules and the rules already implemented in Ontario, Québec and Manitoba.
91-101 –Scope Rule
The Proposed Reporting Rules require certain derivatives transactions to be reported. The definition of “derivative” is extremely broad. For example, in the Securities Act (Alberta) a derivative includes:
an option, swap, futures contract, forward contract or other financial or commodity contract or instrument whose market price, value, delivery obligations, payment obligations or settlement obligations are derived from, referenced to or based on an underlying interest, including a value, price, rate, variable, index, event, probability or thing;
This broad definition arguably captures almost any commercial contract, including most, if not all, contracts for the purchase, sale, transportation or storage of a commodity. In order to lessen the scope of commercial contracts that need to be reported, the 91-101 Scope Rule excludes from reporting certain contracts that fall within the definition of derivative, including physically-settled commodity contracts, spot currency contracts, exchange-traded derivatives and equity incentive plans, all of which must meet certain prescribed criteria. However, most OTC derivatives transactions, including interest rate swaps, equity swaps and options, credit swaps, foreign exchange forwards and most cash-settled commodity derivatives, will need to be reported.
The 91-101 Scope Rule is substantially similar to provincial scope rules 91-506 in Ontario, Québec and Manitoba.
96-101 –Trade Reporting Rule
The 96-101 Trade Reporting Rule provides for the recognition and regulation of derivatives trade repositories and requires that in-scope derivatives transactions be reported to a recognized trade repository. Transactions must be reported if they involve a “local counterparty” in one of the Participating Jurisdictions, which is: (a) a person or company organized under the laws of, or having its head office or principal place of business in, the Participating Jurisdiction; or (b) an affiliate of (a) if responsible for substantially all of the liabilities of (a).
Transactions may be reported by a clearing agency (if the transaction is cleared), a derivatives dealer, a Canadian financial institution or an end user, depending on the reporting responsibility waterfall contained in the 96-101 Trade Reporting Rule. An active trader of OTC derivatives that makes markets, solicits transactions or conducts similar activities will need to consider whether it is a derivatives dealer for purposes of the 96-101 Trade Reporting Rule.
The 96-101 Trade Reporting Rule also prescribes the transaction information that must be reported as well as the timing of reporting. The 96-101 Trade Reporting Rule is substantially similar to provincial trade reporting rules 91-507 in Ontario, Québec and Manitoba.
Key Proposed Differences from Trade Reporting Rules in Ontario, Québec and Manitoba
- Limited Exemption from Reporting Trades of Commodity Derivatives
The Participating Jurisdictions have proposed a limited exemption from reporting a transaction in a derivative based on commodities, other than cash or currency, where: (a) neither counterparty to the transaction is a derivatives dealer, Canadian financial institution or analogous foreign financial institution and (b) each counterparty has, at the time of the transaction, less than $250-million aggregate notional value, without netting, under all its outstanding transactions in commodity derivatives, other than cash or currency, including the additional notional value related to that transaction. While the intention of the Participating Jurisdictions in proposing this exemption is to reduce the regulatory burden on commodity derivatives end-users, such as commodity producers, commodity processors and commodity consumers, it is unclear whether it will be practically feasible for market participants to determine eligibility for this exemption prior to every trade or whether the proposed notional value threshold will have much practical application. The Participating Jurisdictions have invited comments specifically on this aspect of the Proposed Reporting Rules.
- Additional Interpretive Guidance for Physical Commodity Contracts with Optionality
The Participating Jurisdictions have proposed additional guidance on excluded physical commodity contracts for purposes of the 91-101 Scope Rule. The additional guidance suggests that commodity contracts that require physical delivery of a commodity, but that have optionality with respect to the volume or quantity or timing of delivery of the commodity, may still qualify for the exclusion from trade reporting for physically-settled commodity contracts. There is guidance that accompanies the 91-506 scope rules in Ontario, Québec and Manitoba that also addresses optionality in physically settled commodity contracts. Therefore, it remains uncertain whether this additional proposed guidance from the Participating Jurisdictions signals any difference in the interpretative approach. The central issue for this exclusion remains a question of whether a commodity contract with embedded optionality is intended to be physically settled.
- Reporting Responsibility Waterfall and Additional Requirements
The responsibility for reporting derivatives transactions proposed by the Participating Jurisdictions in the 96-101 Trade Reporting Rule is similar to the requirements of the local rules in Québec and Manitoba, but differs from Ontario. Unlike the Ontario rule, which does not impose a heightened reporting responsibility on a Canadian financial institution that is not a derivatives dealer, the Participating Jurisdictions propose that an un-cleared derivatives transaction between a Canadian financial institution and a counterparty that is neither a derivatives dealer nor a Canadian financial institution be reported by the Canadian financial institution. One possible consequence of this distinction is that there may be different reporting responsibilities (in different provinces) where a transaction involves a Canadian financial institution in one province and a counterparty that is neither a derivatives dealer nor a Canadian financial institution in another province.
The Participating Jurisdictions have also proposed changes that are meant to deter ‘dual reporting,’ i.e. the separate reporting of the same transaction by both counterparties to the transaction. Where the reporting responsibility waterfall in the 96-101 Trade Reporting Rule does not determine the reporting counterparty, it is proposed that the counterparties could enter into any written agreement under which the counterparties can freely agree as to reporting party responsibility. This contrasts with the Ontario rule, which limits the form of written agreement and the choice of reporting party responsibility to an agreement and methodology developed and administered by the International Swaps and Derivatives Association. Also, the Participating Jurisdictions have proposed additional obligations on counterparties that are unable to agree as to reporting responsibility to report unique transaction identifiers for dual-reported transactions.
We encourage parties that will be impacted by the Proposed Reporting Rules to send comments to the Participating Jurisdictions before March 24, 2015. Parties that have complied with reporting rules in Ontario, Québec and Manitoba should specifically consider the differences proposed by the Participating Jurisdictions and the potential operational and compliance impacts. We invite you to contact the authors if you have any questions about the Proposed Reporting Rules or the Canadian regulatory regime for OTC derivatives.