Following the September 2009 commitment by G20 leaders to improve the integrity of the markets, reporting of derivatives trades to trade repositories has become critical to regulatory efforts to monitor and detect the build-up of risk in the financial system.
To date, a number of jurisdictions around the world have developed rules and regulations requiring mandatory reporting of derivatives to trade repositories. Derivatives trades are being reported to trade repositories in the United States (since 2012), Japan, Hong Kong, Singapore and Australia (since 2013), the European Union (since 2014), and will soon be followed by Canada which is the latest jurisdiction to transpose G20 requirements on derivatives trade reporting into law.
Coordinated approach among the securities administrators produces harmonised rules
In December 2013, the Ontario Securities Commission (OSC), the Manitoba Securities Commission (MSC) and the Autorité des marchés financiers (AMF) of Quebec, respectively, published rules requiring derivatives trade reporting to trade repositories with respect to transactions involving local counterparties.
Under these rules, trades involving a dealer or a clearing agency will begin on October 31, 2014, while other counterparties such as buy-side firms have until June 30, 2015 to comply with reporting requirements. Nova Scotia, Alberta, New Brunswick, British Colombia and Saskatchewan have legislation pending allowing supervisory authorities in each of those provinces to regulate derivatives reporting.
Notwithstanding the decentralised regulatory framework, securities regulators at a provincial level have a track record of collaboration and coordination, delivering consistency at a federal level. The Canadian Securities Administrators forum has in this instance played a key role by facilitating a regulatory framework which will ensure the adoption of harmonised rules for derivatives reporting across all provinces, albeit at different times.
Furthermore, the regulatory framework agreed by the Canadian Securities Administrators and the subsequent rules which have been published by the three provincial authorities reflect some of the elements of legislation adopted in other key G20 jurisdictions.
As we approach the first deadline in the Canadian implementation calendar, it is important that each derivatives market participant in the three provinces which have adopted the legislation understands what derivatives contracts should be reported, who is responsible for reporting and when the reporting timeline begins.
The what, the who and the when
The scope of legislation covers interest rate, credit, equity, FX and commodity derivatives, for over the counter (OTC) transactions.
While all counterparties to a trade that find themselves in one of the three provinces are required to report their trades under the new rules, Canadian regulators have adopted a phased approach. What this means in practice is that dealers are required to start reporting on October 31, 2014 and non-dealers such as buy-side counterparties and corporates will begin reporting on June 30, 2015. OTC derivatives trades entered into before October 31, 2014 and still outstanding on April 30, 2015 are required to be reported no later than April 30, 2015.
While both dealers and non-dealers are required to report their trades, provided one of the parties classifies as “reporting counterparty”, regulatory authorities only require one sided reporting. One exception involves instances in which both sides to a trade are dealers, in which case both derivatives dealers are required to report. In the event that a dealer does not qualify as a local counterparty, but their non-dealer counterparty does, the dealer and the counterparty can agree that the dealer will report on the counterparty’s behalf.
Definition of dealer
The definition of dealer is currently based on the reporting counterparty rules and is very broad, but that definition is expected to be replaced by a dealer registration process at some undetermined point in the future. Firms need to understand the broad definition that will be in place for the October 31, 2014 compliance date to be sure that they are meeting their regulatory reporting obligations.
Key milestone towards meeting G20 transparency commitments
The rules implementing trade reporting in Canada are an important step towards meeting the country’s commitments in the G20 context, but also in enhancing the transparency and the regulatory oversight of the global derivatives markets. Canadian banks play a big role in facilitating trading in the global derivatives marketplace, and the expectation is that the implementation of the rules will have a significant impact in increasing the transparency in the derivatives markets.
Five years since the G20 commitment, the global derivatives reporting jigsaw is almost complete. As market participants fulfil their reporting obligations in all the major jurisdictions, the attention will turn to the challenge of converting this vast amount of data into information.
As the only global trade repository providing reporting services across all the jurisdictions, which have implemented mandatory reporting of derivatives trades to date, along with all of the required asset classes, we understand the magnitude of this challenge and we will continue to deploy our insights, experience and infrastructure to help both market participants and regulatory community gain a better oversight in what is essentially a global marketplace.