Product Determination and Derivatives Trade Repositories and Data Reporting: Summary of Rule

Published on November 14, 2013, OSC Rule 91-506 Derivatives: Product Determination and OSC Rule 91-507 Trade Repositories and Derivatives Data Reporting (TR rule), is the first internationally harmonized derivatives rule developed by the CSA Derivatives Committee, to come into force in Canada.

Trade reporting is one of the most important elements in derivatives reform, as it brings transparency to a large and systemically important market. This rule will pave the way for future derivatives rules as set out by the G20 commitments. Together, all the rules will form a regime for the regulation of Canada’s over the counter (OTC) derivatives markets.

Derivatives Trade Repositories and Data Reporting
The TR Rule describes requirements for the operation and ongoing regulation of designated or recognized trade repositories and the mandatory reporting of derivatives transaction data by market participants. Its main purpose is to improve transparency in the derivatives market – the pillar of OTC derivatives reform.

Derivatives data is essential for detecting systemic risk issues, market abuse and developing strong oversight systems. Large derivatives exposures by systemically risky entities played a large role in the financial crisis of 2009. With greater access to trade repository data, such exposure would be more easily detected by market regulators and would assist the OSC in addressing systemic issues before they become significant.

Derivatives data will be collected primarily by designated trade repositories, which the OSC will then analyze and use to develop a strong oversight regime.

On April 17, 2014, the OSC amended the TR Rule and extended the July 2, 2014 date for the commencement of OTC derivatives trade reporting to October 31, 2014 for clearing agencies and dealers, and to June 30, 2015 for all other OTC derivatives market participants. The extension will provide additional time for trade repositories engaged in the designation or recognition process to accept market participants onto their systems and develop the reporting infrastructure necessary to comply with the rule.

Canadian Derivatives Reform Progress To Date:

In November 2010, the CSA published CSA Consultation Paper 91-401 Over-the-Counter Derivatives Regulation in Canada, which represented Canada’s response to the G20’s commitments to develop more robust oversight of OTC derivatives. The comments received informed the CSA’s next steps in working towards developing appropriate legislative and regulatory proposals for Canada’s OTC derivatives markets. 

The CSA began the rule-making process with the publication of six Consultation Papers: 

The CSA expect to publish two remaining Consultation Papers, relating to electronic trading and capital and collateral. 

OSC Rules Completed To Date

Proposed OSC Rule 24-503 Clearing Agency Requirements

Published proposed rule: December 18, 2013

This OSC rule will implement the CPSS IOSCO Principles for Financial Market Infrastructures (PFMI) in Ontario. The PFMI sets out new international standards for market infrastructure (which include clearing agencies serving both securities and derivatives markets under the Ontario Securities Act). The international standards raise the minimum requirements for clearing agencies and include new risk-management areas.

The proposed rule aims to strengthen financial systems, making them more resilient and robust, and able to withstand financial crises. The rule will apply to all clearing agencies carrying on business in Ontario, including OTC derivatives clearing agencies.

The comment period closed March 19, 2014.

Proposed CSA Model Rules To Date

CSA Staff Notice 91-304 - Proposed CSA Model Rule for Customer Clearing and Protection of Customer Collateral

Published proposed rule: January 16, 2014

This rule contains requirements for the treatment of customer collateral by clearing members, clearing intermediaries and derivatives clearing agencies, relating to the segregation and use of customer collateral, record-keeping, reporting and disclosure.

Canadian and international regulators are moving toward mandating the clearing of OTC derivatives. This will cause certain market participants, who are not clearing members at a derivatives clearing agency, to clear their OTC derivatives transactions indirectly through market participants that are clearing members (or otherwise provide clearing services).

The comment period closed March 19, 2014.

CSA Staff Notice 91-303 - Proposed CSA Model Rule on Mandatory Central Counterparty Clearing of Derivatives

Published proposed rule: December 19, 2013

This rule will create a framework for the mandatory clearing of certain OTC derivatives and the procedure by which these transactions are mandated.

The proposed Model Rule is divided into two rule-making areas: requirement to submit a clearable derivative to a central counterparty for clearing (including proposed end-user and intragroup exemptions), and determination of derivatives subject to the requirement to submit for central counterparty clearing.

The comment period closed March 19, 2014.

Next Steps in Derivatives Rule-Making

Proposed CSA Registration Draft Model Rule

This rule will create a framework for the registration of derivatives dealers and large derivative market participants, and sets out the requirements applicable to such entities.

*The CSA initially publish “model” rules for consultation, evaluate comments received and recommend appropriate amendments to the model rules. Once this process is complete, each province publishes province-specific proposed rules for comment, then final rules for implementation. The CSA Derivatives Committee intends that all rules will be essentially the same across jurisdictions.