On May 12, 2016, securities regulators in Ontario, Quebec and Manitoba announced changes to existing derivatives trade reporting requirements that will be of interest to both derivatives dealers and “end-users” of derivatives.
The amendments to existing reporting rules (TR Amendments) impose a specific obligation on each transacting party to obtain and maintain a legal entity identifier (LEI); formalize prior relief from the obligation to report end-users’ inter-affiliate trades; postpone and narrow requirements for the public dissemination of anonymous transaction-level data; and make other technical amendments to reporting requirements.
The TR Amendments modify provincial rules, each identified as Rule 91-507 Trade Repositories and Derivatives Data Reporting, and the related companion policies in force in Ontario, Quebec and Manitoba (Existing Rules). These rules mandate reporting of derivatives transactions involving a “local counterparty” in the relevant province and are discussed in our May 2014 Blakes Bulletin: Overview of Canadian Derivatives Trading Reporting Obligations. The TR Amendments were initially proposed in consultation drafts issued by these three provincial regulators in November 2015 and numerous changes to the TR Amendments were made as a result of this consultation process.
Derivatives trade reporting in the other Canadian provinces and territories (Multilateral Jurisdictions) is regulated under Multilateral Instrument 96-101 Trade Repositories and Derivatives Data Reporting (Multilateral Instrument). It is expected that the Multilateral Jurisdictions will, in due course, update their regulations and propose equivalent amendments to those set out in the TR Amendments. For a full description of derivatives trade reporting rules in the Multilateral Jurisdictions, see our January 2016 Blakes Bulletin: Derivatives Trade Reporting Rules Introduced in Remaining Canadian Jurisdictions.
WHAT HAS CHANGED FOR “END-USERS”?
“End-users” (i.e., counterparties that are not engaged in the business of trading in derivatives) generally have no direct trade reporting obligations when entering into transactions with counterparties that are “derivatives dealers” (i.e., counterparties that are engaged in the business of trading in derivatives in the province or territory where the end-user is a local counterparty). As a result, the Existing Rules have had a very limited impact on end-users, except when entering into derivatives transactions with other end-users and to the extent that end-users have been requested by counterparties to obtain an LEI.
The following changes under the TR Amendments will be relevant to end-users:
Obligation on Market Participants to Obtain LEIs
Subject to limited exceptions, the TR Amendments impose a direct obligation on counterparties (including end-users) to obtain, maintain and renew LEIs. LEIs are issued under an international system created for the unique identification of parties to financial transactions. The service providers who issue LEIs generally require that they be renewed annually.
This new requirement addresses a gap in the Existing Rules: reporting counterparties are required to report LEIs for their counterparties, but a reporting counterparty has no right to apply for an LEI on behalf of its counterparty and until the TR Amendments were issued, there was no legal obligation imposed directly on a non-reporting party to obtain an LEI.
Exemption from Reporting Transactions between Affiliated End-Users
Under the Ontario TR Amendments, an end-user that is not affiliated with a derivatives dealer will not be required to report transactions entered into with its affiliates.
This development confirms and extends informal interim relief that Ontario market participants have been relying on since June 2015, and goes further than the initially proposed form of exemption published in November 2015, which would have only provided an exemption from reporting requirements if both transacting affiliates were local counterparties in Canada.
Given the administrative burden that any reporting obligation entails, this amendment should be a welcome development for end-users.
This rule amendment was not included in the Quebec and Manitoba TR Amendments, but there are existing blanket orders in both provinces that remain in force and provide for similar relief so long as certain conditions are met, including that the inter-affiliate transaction is governed by a written agreement setting out the terms of the transaction and including terms relating to centralized evaluation, measurement and risk controls. For further details, please see our June 2015 Blakes Bulletin: Derivatives End-Users Granted Interim Relief from Trade Reporting Obligations for Inter-Affiliate Transactions.
POSTPONEMENT AND NARROWING OF PUBLICATION OF TRANSACTION-LEVEL DATA
Under the Existing Rules, all transactions that are reported to a trade repository other than inter-affiliate transactions would be subject to public dissemination of transaction details, including pricing, term and notional size at the transaction-level. While these transaction-level reports would not disclose the identity of the counterparties to the transaction, some market participants noted that given the relative size and illiquidity of the Canadian market, the dissemination requirements could unduly impact a party’s ability to hedge transactions before information regarding such party’s trading activity becomes publicly available.
The TR Amendments substantially narrow the requirements under the Existing Rules regarding the public dissemination of transaction-level data by trade repositories. In particular, the TR Amendments provide that public dissemination of transaction details will be subject to publication delays of 48 hours from the time a transaction is executed; additional protections are provided in the form of capping and rounding of reported transaction notional amounts; and the classes of transactions for which public dissemination will be required will now be based on their relative trading liquidity. Transaction-level public reporting will initially only apply to interest rate swaps that reference certain benchmark Canadian dollar, U.S. dollar, pounds sterling and Euro bankers’ acceptance or inter-bank lending rates as well as equity derivatives on any index and credit derivatives on any index. Cross-currency swaps are also excluded from the transaction-level public dissemination requirement.
Under the Existing Rules, the public dissemination of transaction-level data would have been required beginning on July 29, 2016, but this reporting start date has now been postponed until January 16, 2017.
TECHNICAL AMENDMENTS OF RELEVANCE TO REPORTING COUNTERPARTIES
Clarification of “Local Counterparty”
A helpful clarification was added in the TR Amendments in respect of the reporting counterparty’s obligation to include in a trade report a listing for each counterparty of all jurisdictions in which the counterparty is a “local counterparty”.
The Multilateral Instrument defines “local counterparty” to include any person engaged in the business of trading in derivatives in the relevant Multilateral Jurisdiction (including on a cross-border basis, and without regard to actual dealer registration status). Accordingly, under the Existing Rules, reporting parties would have had to collect and report this information regarding “deemed dealer” status. Moreover, local regulators might have had difficulty efficiently distinguishing between transaction reports that involve a market participant that is headquartered or incorporated in the Multilateral Jurisdiction as opposed to transactions that have no connection to the jurisdiction other than the fact that either or both parties are deemed dealers in the province.
The TR Amendments eliminate this concern in Ontario, Quebec and Manitoba by providing that reporting counterparties should ignore deemed dealer status in the Multilateral Jurisdictions when reporting the jurisdictions in which the parties are local counterparties.
COMING INTO FORCE
The TR Amendments will come into force on July 29, 2016.
We wish to acknowledge the contribution of Paul Rand to this publication