Proposed National Instrument 93-102 Derivatives: Registration

On April 19, 2018, the Canadian Securities Administrators (CSA) published the Proposed National Instrument 93-102 Derivatives: Registration (the Proposed Instrument) and the Proposed Companion Policy 93-102 Derivatives: Registration (the CP), for a 150-day comment period, expiring on September 17, 2018. The Proposed Instrument and CP are intended to implement a comprehensive regime for regulating persons or companies in the business of trading over-the-counter (OTC) derivatives and advising on derivatives. The Proposed Instrument and CP are also intended to help protect investors, reduce risk, and improve transparency and accountability in the OTC derivatives markets.

Purpose

The Proposed Instrument and the CP establish a protective regime that not only meets the International Organization of Securities Commissions (IOSCO) international standards, but is also consistent with the regulatory approach taken by most IOSCO jurisdictions with active OTC derivatives markets. The Proposed Instrument is designed:

• to reduce risks to market participants and protect investors;

• to ensure that key staff members of derivatives dealers and derivative advisers have the necessary education, training and experience needed to carry out their obligations;

• for derivative firms and individual representatives to register with applicable securities regulators in Canada and allow those regulators to deny registration in appropriate circumstances; and

• to improve transparency and accountability.

Who does it apply to?

The requirement to register applies to a person or company who is in the business of trading or advising in OTC derivatives or holds itself out to trading or advising in OTC derivatives. The Proposed Instrument consists of a number of exemptions from the requirement to register and from specific registration requirements. These exemptions include, but are not limited to:

• end-users;

• derivatives dealers that have a limited notional amount of derivatives, currently proposed as $1 billion for commodity derivatives and $250 million for all other OTC derivatives, subject to further analysis and discussion about the thresholds and the definition and methodology for determining the dealer’s “notional amount”;

• certain OTC derivatives dealers and advisers that have their head offices or principal places of business outside Canada, provided that they are subject to and comply with equivalent requirements in the jurisdiction where their head offices or principal places of business are located and are not dealing with “retail” customers;

• registered derivatives dealers that are already dealer members of the Investment Industry Regulatory Organization of Canada (IIROC) and that comply with equivalent requirements set out by IIROC; and

• Canadian financial institutions that are subject to and comply with equivalent requirements imposed by a federal or provincial prudential authority – e.g., OSFI and AMF.

Points of note

The Proposed Instrument outlines many of the anticipated aspects of derivatives dealer and advisor registration. It is notable that the Proposed Instrument addresses many aspects of cross-jurisdictional coordination within Canada and on a cross-border basis designed to achieve consistency and reduce regulatory burden for market participants that are regulated in multiple jurisdictions. However, there are still a number of open questions, including:

• On April 4, 2017, the CSA published for comment Proposed National Instrument 93-101 Derivatives: Business Conduct and Proposed Companion Policy 93-101 Derivatives: Business Conduct (referred to as the Business Conduct Instrument). Future versions of the Business Conduct Instrument will be published for a second comment period shortly after the publication of the Proposed Instrument, so there will be considerable overlap of each instrument’s comment period. This will allow commenters and the CSA to consider the Proposed Instrument and the revised Business Conduct Instrument together.

• Transitional rules, including with respect to proficiency requirements, are to be developed and added later.

• Amendments to other instruments and policies for registration, including National Instrument 33-109 Registration Information, need to be considered and addressed, in order to establish the operational infrastructure for registration.

• The provinces/territories need to consider whether amendments to their own securities legislation is needed for coordination with the Proposed Instrument – for example, the Quebec Derivatives Act and the Ontario exemption from dealer registration for certain financial institutions.

• The Proposed Instrument states that a later version may include an additional category of registration for very large non-dealer derivatives participants, similar to the “major swap participant” category under U.S. derivatives regulation.

• Minimum capital requirements are to be published for comment in a future instrument, and the CSA states this is being considered and designed to be similar to regulations in other jurisdictions and will contain exemptions for those that are already prudentially regulated in other jurisdictions.

• The notional amount thresholds and the methodology for calculating the notional amount (including the notional amount threshold for the “smaller volume” registration exemption) are to be further discussed and considered.

• A further version of Appendix F will be published with respect to specific requirements that dealers regulated by OSFI, the AMF and other provincial regulators are exempted from.

• The “eligible derivatives party” concept is to be further considered and developed, as transactions involving such parties do not require the full set of protections afforded to “retail” customers/investors and this concept serves an important gatekeeping function since certain firm and individual registration exemptions are not available if a firm or individual deals with or advises non-eligible derivatives parties.

• In order to reduce the regulatory burden for non-Canadian dealers, the Proposed Instrument provides that the dealer can make relevant notifications/reporting to the regulator in its head office jurisdiction and outlines coordination for the process of registration in multiple jurisdictions. However, much of the detail of this is yet to be developed.

Comment period

The CSA states that it is specifically seeking comments in writing by September 17, 2018, on the following aspects of the Proposed Instrument:

• The definition of “notional amount” and the methodology for calculating the notional amount for purposes of a number of thresholds, including the threshold for the “smaller volume” registration exemption.

• The definition of “affiliated entity” for purposes of jurisdictional scope.

• The definition of “eligible derivatives party,” which serves a gatekeeping function as to the greater set of protections afforded to “retail” customers.

• Exemption from registration for derivatives advisory activities that are incidental to existing securities registered advisor/portfolio manager activities.

• The details of the proficiency requirements, which in the Proposed Instrument focus more on experience requirements due to the framework for derivatives courses/examinations proficiency not yet being in place.

• Requirements, roles and responsibilities of ultimate designated persons, chief compliance officers and chief risk officers.

• Minimum requirements for risk management policies and procedures.

• Certain cross-border aspects of calculating the volume thresholds for derivatives dealer registration requirements.

• Interactions and coordination with IIROC dealer requirements.

The authors would like to thank articling student Shirley Wong for her assistance in preparing this legal update.