Written by Mark Powell
On June 30, 2016, the securities regulators of Alberta, New Brunswick, Newfoundland and Labrador, Northwest Territories, Nova Scotia, Nunavut, Prince Edward Island, Saskatchewan and Yukon (the "Announcing Jurisdictions") announced that they had finalized certain amendments to the derivatives trade reporting rules that recently came into effect in each of the Announcing Jurisdictions as well as in British Columbia (collectively, the "Participating Jurisdictions").
In this regard, the Announcing Jurisdictions have issued finalized amendments to Multilateral Instrument 91-101 entitled "Derivatives: Product Determination"(the "New Scope Rule") and Multilateral Instrument 96-101 entitled "Trade Repositories and Derivatives Data Reporting" (the "New Trade Reporting Rule") as well as the applicable companion policies (see Canadian Securities Regulators Amend Derivatives Reporting Rules). It is expected that the British Columbia Securities Commission will publish a notice adopting these same amendments to the New Scope Rule and the New Trade Reporting Rules shortly.
The announcement of these amendments is timely as first reporting under the New Trade Reporting Rule is scheduled to occur on July 29.
As mentioned in the notice issued by the Announcing Jurisdictions, these amendments were developed in cooperation with the staff with the securities regulatory authorities in the Canadian jurisdictions in which the reporting of derivatives is already occurring (being Manitoba, Ontario and Quebec) with the goal of substantive harmonization.
On the whole, we believe our clients will find the amendments to be helpful. However, there are a couple of amendments that we think will be particularly beneficial to our clients.
Physical Commodity Clarification
More specifically, with respect to the New Scope Rule, we expect that a relatively simple amendment to the companion policy to the New Scope Rule will be appreciated by our clients that physically trade commodities. Under section 2(1)(d) of the New Scope Rule, a contract or instrument for the delivery of a commodity (other than currency) does not need to be reported if:
(a) the counterparties intended, at the time of execution of the transaction, that the contract or instrument would be settled by delivery of the commodity (the "Intention Test") and
(b) the contract or instrument does not permit cash settlement in place of delivery of the commodity, except if all or party of the delivery is rendered impossible or commercially unreasonable by an intervening event or occurrence not reasonably within the control of the counterparties, their affiliated entities or their agents (the "Intervening Event Test").
While the Intention Test seems quite straight forward, it is quite common in the physical commodities trading industries to includes provisions which allow the counterparties to terminate transactions upon certain events that may be within the control of one of the parties and settle the transaction physically.
In the companion policy to the New Scope Rule, the applicable regulators had previously clarified that these types of clauses would not necessarily defeat the Intention Test. However, until the amendments announced on June 30, 2016, the companion policy was silent as to whether those types of provisions would defeat the Intervening Event Test.
As some of the triggers for these types of clauses are potentially within the control of the counterparties (for example, a counterparty could refuse to pay even though it was otherwise able to pay), there was some concern that these types of clauses could negate the Intervening Event Test and, as such, the transactions would need to be reported under the New Trade Reporting Rules.
With the amendments made to subsection (d) of the companion policy to the New Scope Rule, the securities regulators have provided written comfort that such clauses will not necessarily negate the Intervening Event Test.
Harmonized Inter-Affiliate Trade Approach
With respect to the New Trade Reporting Rules, the most helpful amendments relate to the finalized exemption to report derivatives transactions entered between affiliates ("Inter-Affiliate Trades"). In our update of June 20, 2016, entitled "Harmonized Discretionary Relief for New Trading Rules," we had noted that it appeared as though the Participating Jurisdictions were going to take a different approach to excluding Inter-Affiliate Trades under the New Trade Reporting Rules than the approach recently adopted in Manitoba, Ontario and Quebec.
We were led to believe this was the case as, on June 17, 2016, the applicable regulators indicated that they anticipated that their approach to reporting Inter-Affiliate Trades would be substantially in the same form as they had previously published (as opposed to the new approach adopted by Manitoba, Ontario and Quebec)
However, in the June 30, 2016, amendments to the New Trade Reporting Rules, we were relieved to see that the Participating Jurisdictions adopted the same approach as Manitoba, Ontario and Quebec (see our prior update of May 13, 2016, entitled "Ontario, Quebec and Manitoba adjust approach to reporting Inter-Affiliate Trades").
Under the new approach of all of the jurisdictions in Canada, there is no longer a distinction between Inter-Affiliate Trades entered between Canadian and non-Canadian affiliates for the purposes of the trade reporting requirements. That being said, all of the securities regulators in Canada have confirmed that they are further studying this issue as well as monitoring international regulators' approaches with respect to Inter-Affiliate Trade reporting.
Once again, we believe that the recently announced amendments will be considered helpful by our clients. If you have any questions relating to your trade reporting obligations, please do not hesitate to contact us.