Canadian Securities Administrators Propose Amendments to OTC Derivatives Trade Reporting Rules

The Canadian Securities Administrators (CSA) have published proposed amendments (Proposed Amendments) to the Provincial Trade Reporting Rules (defined below). The Proposed Amendments are meant to streamline Canada’s over-the-counter (OTC) derivatives data reporting regime and more closely harmonize Canadian standards with those of the U.S. Commodity Futures Trading Commission (CFTC) and the Committee on Payments and Market Infrastructures and International Organization of Securities Commissions joint working group for the harmonization of OTC derivatives data elements (CPMI-IOSCO Working Group).

The Proposed Amendments would be implemented through revisions to the OTC trade reporting rules applicable in each province and territory (these include Manitoba Securities Commission Rule 91-507 Trade Repositories and Derivatives Data Reporting; Ontario Securities Commission Rule 91-507 Trade Repositories and Derivatives Data Reporting; Autorité des marchés financiers Regulation 91-507 respecting Trade Repositories and Derivatives Data Reporting; and Multilateral Instrument 96-101 Trade Repositories and Derivatives Data Reporting), as well as by updating each related companion policy and publishing new technical manuals for each jurisdiction (collectively, the Provincial Trade Reporting Rules).

The CSA expects to finalize and implement the Proposed Amendments in 2024, after the implementation of corresponding amendments to the CFTC’s rules, and to introduce transition guidance.

The comment period for the Proposed Amendments expires on October 7, 2022.

SUMMARY OF PROPOSED AMENDMENTS

Unique Transaction Identifier (UTI)

The Proposed Amendments set out a hierarchy to determine which counterparty to an OTC derivatives trade will be responsible for generating a related UTI. The hierarchy aligns with guidance published by the CPMI-IOSCO Working Group, and also generally mirrors the reporting counterparty hierarchy under the Provincial Trade Reporting Rules.

Unique Product Identifier (UPI)

The Proposed Amendments require a reporting counterparty to identify a subject transaction using a UPI assigned by the Derivatives Service Bureau.

Updates to Minimum Data Elements

The data fields required to be reported to Canadian designated trade repositories have been streamlined to align with global standards.

New Derivatives Data Technical Manuals

New OTC derivatives data technical manuals are being published to provide guidance on administrative matters, including to conform to international data standards. This aligns with the CFTC’s approach and will permit flexibility to harmonize Canadian requirements with international developments. Drafts of the manuals are posted to the provincial securities regulators’ websites.

New Requirements for Designated Trade Repositories

The Proposed Amendments update the governance, risk and operational requirements applicable to designated trade repositories, to better align with international standards. For example, new provisions would require designated trade repositories to (i) have mechanisms to review service levels, pricing structure, costs and operational reliability; and (ii) manage risks from link and tiered participation arrangements.

Confidentiality for Anonymously Executed Trades

The Proposed Amendments add provisions to align with the CFTC’s rules requiring the identity of a counterparty to an anonymous transaction executed on a derivatives trading facility not to be disclosed to other users of the platform.

Data Validation

Designated trade repositories will be required to validate that the data received from a reporting counterparty satisfies the required data elements of the Provincial Trade Reporting Rules and the standardized formats and values set out in the technical manuals. Derivatives data that fails the validation procedures would be rejected by the designated trade repository, and the reporting counterparty will be deemed not to have fulfilled its reporting obligation. In addition, designated trade repositories will maintain records of failed validation tests.

Data Accuracy Verification

The Proposed Amendments would replace the requirement that designated trade repositories confirm data accuracy with reporting counterparties with two new requirements: (1) reporting counterparties must ensure that reported data is accurate and contains no misrepresentation and (2) reporting counterparties that are derivatives dealers and recognized or exempt clearing agencies will also be required to verify the accuracy of data every 30 days. Designated trade repositories will be required to provide counterparties with timely access to relevant derivatives data and establish, maintain and enforce written policies and procedures to enable compliance.

Clearing Agencies Must Report Terminations

The Proposed Amendments will require a recognized or exempt clearing agency to report the termination of an original transaction for a cleared transaction, consistent with CFTC requirements.

Collateral and Margin Data Reporting

The Proposed Amendments will require any reporting counterparty that is a derivatives dealer or a recognized or exempt clearing agency to report collateral and margin data each business day until the transaction is terminated or expires. The Proposed Amendments introduce new data elements relating to collateral and margin, which reflect standards published by the CPMI-IOSCO Working Group.

Derivatives Trading Facilities Required to Report

The Proposed Amendments would require any transaction involving a local counterparty that is executed anonymously on a derivatives trading facility and that is intended to be cleared through a clearing agency that is not a recognized or exempt clearing agency to be reported by the derivatives trading facility.

Transactions with Individuals Required to be Reported

Individuals are not currently “local counterparties” under the Provincial Trade Reporting Rules. Transactions with individuals are nevertheless required to be reported where the other counterparty to the transaction is a local counterparty (for example, an Alberta derivatives dealer transacting with an individual). Where a transaction is between a Canadian individual and a non-Canadian derivatives dealer, the transaction is not currently required to be reported as it does not involve a local counterparty.

The Proposed Amendments will add individuals that are resident in a Canadian province or territory to the applicable definitions of “local counterparty”.

Consequently, for example, a transaction between an individual who is a resident of Alberta and a non-Canadian derivatives dealer will now be required to be reported by the non-Canadian derivatives dealer. Individuals will not themselves be required to report or to obtain a Legal Entity Identifier.

Crypto Clarification

The Proposed Amendments will include guidance that OTC derivatives linked to crypto assets generally are required to be reported under the Provincial Trade Reporting Rules.

Reporting Hierarchy

Under Ontario’s trade reporting rule, the reporting hierarchy states that, if both counterparties to a reportable transaction are derivatives dealers that are party to the ISDA Multilateral Agreement on Canadian trade reporting, the ISDA methodology (prescribed by such agreement) will determine the reporting counterparty that is obligated to report the trade. Otherwise, both derivatives dealers are obligated to report, and while they may delegate reporting, they each retain the regulatory obligation to ensure the trade is appropriately reported.

In the other CSA jurisdictions, derivatives dealers transacting with each other are permitted to agree through a written agreement which of them is required to report under the applicable Provincial Trade Reporting Rule. Under this “variable approach”, the determination as to which derivatives dealer is the reporting counterparty may differ for each relationship, asset class or transaction.

The Ontario Securities Commission (OSC) has, in its release regarding the Proposed Amendments, indicated it will not adopt a "variable approach”, but rather will either (1) maintain its current reporting hierarchy (subject to other aspects of the Proposed Amendments that affect the current hierarchy), or (2) adopt an alternative hierarchy that builds on the current hierarchy (as it is proposed to be amended). The alternative hierarchy would insert an additional step, just prior to the step where both counterparties that are dealers are deemed to be subject to the trade reporting obligation, stating that where there are two derivatives dealers, one that is a “financial entity” and one that is not a “financial entity,” the financial entity is the reporting counterparty for the transaction. “Financial entities” will include Canadian banks, trust companies, insurance companies, credit unions and regulated pension funds, dealers and asset managers.

This “alternative hierarchy” is intended to recognize that derivatives dealers that are “financial entities” may generally be better positioned to report OTC derivatives transactions than derivatives dealers that are not financial entities. For example, a commodity dealer or money services business transacting with a bank may currently delegate its reporting obligation to the bank. Under the alternative hierarchy, the bank would be the reporting counterparty in this situation, which avoids the need for delegation.

The OSC and the CSA members in the other Canadian jurisdictions have specifically requested comment on the OSC’s proposed “alternative hierarchy.”

For further information on any current market developments and regulatory initiatives, please contact:            

Stephen Ashbourne    +1-416-863-3086
Chris Barker                 +1-416-863-2710
Aaron Palmer               +1-416-863-4227
Tim Phillips                   +1-416-863-3842
Michael Hayes             +1-416-863-5826
 
or any other member of our Derivatives group.