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Canada | Publication | March 2022
The Canadian Securities Administrators (CSA) are one step closer to establishing a national business conduct regime for persons who deal in or advise on over-the-counter (OTC) derivatives. On January 20, 2022, the CSA published proposed National Instrument 93-101 Derivatives: Business Conduct (the Proposed Instrument) and its companion policy (CP). In many Canadian jurisdictions OTC dealers and advisers are currently regulated by assorted blanket rulings. A national conduct regime was initially proposed in 2017 and the Proposed Instrument follows two prior consultations published since 2017. It is anticipated it will come into force with a proposed new registration rule, proposed National Instrument 93-102 Derivatives: Registration (the Registration Instrument). The latest version of the Registration Instrument was published in April 2018 and our legal update is available here.
This update provides a brief overview of the Proposed Instrument and highlights the principal changes since the prior proposal.
The Proposed Instrument, if adopted, will establish a robust national code of conduct that not only meets the International Organization of Securities Commissions (IOSCO) standards, but is also consistent with the regulatory approach taken by most IOSCO jurisdictions with active OTC derivatives markets. The Proposed Instrument and Registration Instrument are designed to:
Conduct Addressed
The Proposed Instrument regulates the following conduct of OTC derivatives market participants:
The obligations of a dealer or adviser imposed by the Proposed Instrument will depend upon the counterparty that the dealer or adviser is engaged with. The requirements are similar to the requirements for securities dealers and advisers but are tailored to the OTC market. Investor protection is based on a two-tiered approach depending upon the other party to the derivative transaction:
EDPs include Canadian financial institutions, pension funds, securities and derivatives dealers and advisers registered in any jurisdiction, corporations with net assets of $25 million or more, commercial hedgers and individuals with net assets of $5 million or more. Both specified commercial hedgers and individuals must make certain representations regarding their knowledge and experience.
Application
The Proposed Instrument applies to a “derivatives dealer” or “derivatives adviser,” which is defined as persons in the business of dealing or advising or holding themselves out as being in the business of dealing or advising in OTC derivatives regardless of whether they are required to be registered or exempt from registration under the Registration Instrument. For example, certain Proposed Instrument requirements apply to federally regulated financial institutions regardless of the availability of an exemption from registration. The CP sets out factors to be considered in determining whether there is an obligation to comply with the code. The Proposed Instrument also contains a number of exemptions.
The changes introduced in the Proposed Instrument focus mainly on preserving access to the derivatives market, market liquidity and the ability of market participants to comply within an existing compliance system. The following are key changes to the previous version of the Proposed Instrument:
The CSA requested comments on the above changes, among others, by March 21, 2022. The CSA has indicated the Proposed Instrument will come into effect one year after the instrument is finalized. We currently anticipate the Proposed Instrument will not be effective until late 2023. A copy of the current proposal is available here.
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