by Donna Bales
With the dawn of a new year, Derivative Dealers operating in Canada woke up to the fact that they must quickly get up to speed on two new Rules released by the Canadian Securities Administrations (CSA) ‘Committee’. The ‘Committee’ not only released its Proposal on Central Counterparty Clearing of Derivatives in mid-December but Ontario, Manitoba and Quebec finalized two Provincial Model Rules for Trade Reporting: (i) Derivatives: Product Determination (91-506) and (ii) Trade Repositories and Derivative Data Reporting (91-507) effective 31 December 2013.
Market participants have until March 19 to respond to the consultation on Central Clearing. While this gives local counterparties some time before they will be mandated to clear their derivative transactions, they must begin to prepare to report trades to a Designated Trade Repository (DTR). Market participants must make note of two key dates on their 2014 calendar. The trade-reporting obligation will begin on July 2 for transactions when a Dealer is the counterparty to a trade and on September 30 for counterparties that are non-Dealers and a non-Dealer is on both sides of a transaction.
In the final trade reporting rules, many of the more contentious issues have been somewhat softened or entirely eliminated from these rules. For example, reporting counterparties will no longer have to identify the custodian in the trade file and there is now a provision for limited substitute compliance. Also, the requirement to publish aggregated data specifying the ‘geographic location’ and ‘type of entity’ has been removed and public dissemination of transaction level data by a designated trade repository has been delayed for six months. This delay will give the committee time to further consider the appropriateness of this requirement.
From an actual reporting standpoint, the product scope in the Rule (91-506) has been clarified to include derivatives executed on derivative trading facilities even though trades executed on the exchange do not need to be reported.
Trades must be reported in real-time unless it is impractical or impossible to do so. While Rule 91-507, Trade Repositories and Derivative Data Reporting, has established a trade reporting hierarchy, reporting is ultimately the responsibility of the local counterparty. Reporting responsibility can fall to different parties depending on the situation. It is the clearing agent’s responsibility for transactions cleared through a recognized or exempt clearing agency and the dealer’s responsibility for un-cleared transactions between a dealer and another dealer or a dealer and their counterparty. Where two local counterparties trade, both must report to the DTR. Since the onus of reporting always falls on the local counterparty, when a buy-side institution trades with a foreign counterparty that does not comply with the local reporting rules, the local counterparty must report by the second business day following the transaction.
Reporting firms have two important considerations: first, a reporting counterparty must decide whether they delegate trade reporting and second, they will have to decide how they reconcile and track what and how they have reported to reduce their regulatory burden and ensure compliance to the Rules. The reporting of valuation data is now consistent with the U.S. Rules which require reporting by only one counterparty daily if the counterparty is a Derivatives Dealer or a recognized or exempt clearing agency and quarterly if the counterparty is not a Dealer or a recognized or exempt clearing agency.
Time is of the essence and there is little room for creativity or complacency. The deadline is a short six months away and reporting firms will need to begin work immediately on preparing their systems, reviewing and understanding the Rules for each province, ensuring that they have a legal entity identifier (LEI) and adapting their operational processes. While it is still unclear at this time who will apply to operate a trade repository in Canada, DTCC and/or CME are likely candidates.
Written by Donna Bales – Founder of Balmoral Advisory Group.
Donna frequently writes on the international developments of the OTC Derivative Reforms. She led the product development efforts of Markit BOAT, a trade repository established by the industry to meet the requirements for trade reporting OTC equities under MiFID.