The Canadian Securities Administrators (CSA) has published for comment Proposed National Instrument 93-102 Derivatives: Registration and Proposed Companion Policy 93-102 Derivatives: Registration (Together, these are referred to as the Proposed Instrument.) The 150-day comment period ends September 17, 2018.
The Proposed Instrument, together with the Proposed National Instrument 93-101 Derivatives: Business Conduct and Proposed Companion Policy 93-101 Derivatives: Business Conduct (referred collectively as the Business Conduct Instrument), which was published for comment in April of 2017, are intended to implement a comprehensive regime for the regulation of persons or companies that are in the business of trading derivatives and in the business of advising on derivatives.
CSA staff expect that a future version of the Business Conduct Instrument will be published for a second comment period shortly after the publication of the Proposed Instrument so that there will be considerable overlap of each instrument’s comment period. This will allow commenters to consider the Proposed Instrument and the revised Business Conduct Instrument together when making their comments.
Background:
In April 2013, the CSA published for comment a consultation paper, CSA Consultation Paper 91-407 Derivatives: Registration (the Consultation Paper), that outlined a proposed registration and business conduct regime for derivatives market participants. After considering the comments received on the Consultation Paper and reviewing developments internationally, CSA staff have published the Proposed Instrument.
Staff from certain jurisdictions will consider whether modifications to securities legislation, including act amendments, are needed to implement the Proposed Instrument. In particular, it is known that accredited counterparties are exempt by law from the registration requirement under the Québec Derivatives Act when transacting with each other. The implementation of the Proposed Instrument is therefore subject to the Québec National Assembly’s decision to revoke this exemption.
While the registration regime contemplated by the Proposed Instrument would apply in all CSA jurisdictions, Ontario’s Securities Act provides that certain specified financial institutions are exempt from registration. As a result, the Ontario Securities Commission (the OSC) will not register those specified financial institutions when they act as derivatives dealers or advisers in the Ontario market.
OSC staff note that to the extent these financial institutions are acting as derivatives dealers or advisers, they will be subject to the Business Conduct Instrument, other relevant requirements and prohibitions under Ontario securities law, and various powers that are available to the OSC to promote compliance with the law. These specified financial institutions are also subject to certain prudential obligations and oversight. OSC staff would expect to employ all of the available tools, as appropriate, to attempt to achieve outcomes that are as closely aligned as possible to future outcomes of the Proposed Instrument.
Even with the regulatory tools discussed above, the OSC has identified a gap that relates to the registration of individual representatives of specified financial institutions and is currently assessing potential regulatory solutions that are available to address this gap.
Substance and Purpose:
The CSA has developed the Proposed Instrument to help protect investors, reduce risk and, improve transparency and accountability in the over-the-counter (OTC) derivatives markets. It is the view of the regulator, that during the financial crisis of 2008, some firms dealing in derivatives contributed to the crisis by not effectively managing their own derivatives related risks. Responding to this, the Proposed Instrument includes requirements:
- designed to mitigate risks to market participants;
- designed to ensure that key staff members of derivatives dealers and derivatives advisers have the necessary education, training, and experience needed to carry out their obligations; and,
- for derivatives firms and individual representatives to register with applicable securities regulators in Canada and allow those regulators to deny registration to a firm or an individual or suspend the registration of a firm or an individual in appropriate circumstances.
The Proposed Instrument, together with the Business Conduct Instrument, is intended to establish a robust investor protection regime that meets The International Organization of Securities Commissions (IOSCO)’s international standards. The resulting proposed regime is consistent with the regulatory approach taken by most IOSCO jurisdictions with active derivatives markets.
A person or company is subject to the Proposed Instrument only if it must register as a derivatives adviser or a derivatives dealer under securities legislation. The Proposed Instrument also provides exclusions and exemptions for certain persons or companies from the requirements to register as a derivatives dealer or as a derivatives adviser. Persons or companies that are excluded or exempted from the requirement to register are not subject to any obligations under the Proposed Instrument other than the conditions relating to the exclusion or exemption.
This version of the Proposed Instrument does not include registration requirements for persons that have very large gross notional amounts under derivatives but would not otherwise be required to be registered. After additional analysis relating to Canadian derivatives markets, a future version of the Proposed Instrument, that will be published for comment, may include an additional registration category for these large non-dealer derivatives participants.
Conditional Exemptions:
The Proposed Instrument provides a number of exemptions from registration requirements, subject to specific terms and conditions. The exemptions include:
- an exemption from registration for derivatives dealers that have a limited notional amount of derivatives. (The notional amount is determined based on the derivatives dealer’s aggregate month-end gross notional amount under outstanding derivatives.);
- exemptions from the requirement to register for certain derivatives dealers and derivatives advisers that have their head office or principal place of business outside of Canada; and,
- an exemption from specific registration requirements meeting certain requirements, including an exemption from specific registration requirements is for registered derivatives dealers that are dealer members of the Investment Industry Regulatory Organization of Canada (IIROC). This particular exemption is subject to the condition that dealers comply with the equivalent requirements imposed by IIROC.
CSA Notice and Request for Comment Proposed National Instrument 93-102 Derivatives: Registration and Proposed Companion Policy 93-102 Derivatives: Registration is available for download from the websites of participating jurisdictions.
For more information, please call Barbara Hendrickson at BAX Securities Law (416) 601 -1004.
This publication is not intended to constitute legal advice. No one should act on it or refrain from acting on it without consulting with a lawyer. BAX does not warrant or guarantee the accuracy or currency or completeness of the publication. No part of this publication may be reproduced without the prior written permission of BAX Securities Law.
