Canada Tackles OTC Reforms

Terry Flanagan

Flurry of consultation papers due out in next two months.

Canada is embarking on meeting its G20 commitment to have derivatives reforms in place by the end of 2012, with a flurry of consultation papers due out in January and February, covering the gamut of OTC reforms.

The Canadian Securities Administrators (CSA) has released a timetable of public consultations related to derivatives reforms, which calls for seven publications over the next two months, to go along with the two that were published in 2011.

Before the end of January, regulators will publish a consultation on segregation and portability of derivatives (91-404). In February, they will publish consultations on central counterparty clearing (91-405), registration (91-406), exemptions (91-407), exchange and platform trading (91-408), and capital and collateral (91-409).

In 2011, consultation papers were put out for comment on trade repositories (91-402), and surveillance and enforcement (91-403).

In 2010, the CSA issued its consultation paper on proposed OTC derivatives regulation (91-401), which laid out the overall roadmap of derivatives reforms.

The consultation paper enumerated specific objectives, including mandatory reporting of all derivatives trades by Canadian counterparties to a trade repository.

Regulators are steering a middle course with respect to OTC reforms. While they are mindful of similar reforms taking place in other jurisdictions, notably the U.S. and Europe, they don’t want to either parrot those approaches or veer too far away from the,.

“We don’t want to be either the Wild West of derivatives or so strict as to have no transactions,” a Canadian derivatives attorney told Markets Media. “We want to see what the EU, the U.S. and Japan are doing, and then come up with workable solutions.”

Until the CSA’s regulations are finalized, regulations will continue to be promulgated at the provincial level.

Provincial regulators are taking steps to smooth the path toward a national regulatory regime by removing uncertainties in the current law, including whether OTC derivatives should be classified as securities, and therefore be subject to securities laws now on the books.

A recent exemption order granted by the Ontario Securities Commission (OSC) provides Ontario market participants with a path to achieving clarity regarding dealer registration and prospectus requirements, according to a report by law firm McMillan LLP.

“While recent amendments to the Ontario Securities Act, and the OTC derivatives regulatory reform efforts of the CSA Derivatives Committee, suggest that any regulatory uncertainty in this area is only temporary, waiting is not an option for market participants, who need to comply with the law as it currently exists,” said McMillan.

Unlike most other major Canadian jurisdictions, Ontario does not yet have a specific regime governing trading in OTC derivatives. As a result, Ontario market participants need to determine whether or not the instruments they trade fall within the definition of a “security” in the Securities Act and are, therefore, subject to prospectus and dealer registration requirements.

“As the exact parameters of the definition of ‘security’ under the Act are constantly evolving, it is very difficult for market participants to precisely identify which OTC derivatives activities are subject to regulation under the Act,” McMillan said.

It is expected that the CSA Derivatives Committee’s soon to be released consultation paper concerning dealer registration requirements for OTC derivatives trading will provide greater insight into the views of Canadian regulators and point the way to a truly uniform pan-Canadian regime, said McMillan.

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