Quebec’s Contribution to Canada’s G20 Commitments – New Rules Concerning Derivatives

December 20, 2013 | Bernard Blouin, Bruno Caron | Montréal

Miller Thomson LLP

On November 14, 2013, the Quebec Autorité des marchés financiers (AMF) published the final version of Regulation 91-506 respecting derivatives determination (Regulation 91-506) dealing with product determination and Regulation 91-507 respecting trade repositories and derivatives data reporting (Regulation 91-507) dealing with derivatives trade repositories (TR) and data reporting (DR).  Concurrently with Quebec, Ontario and Manitoba also published their own harmonized province-specific versions of Regulation 91-506 and Regulation 91-507.  These new rules are set to become effective on December 31, 2013, except for Parts 3 and 5 of Regulation 91-507 which will come into force only on July 2, 2014[1].  Part 3 deals with DR while Part 5 deals with a de minimis exemption for certain physical commodity transaction. The AMF is implementing Regulation 91-506 and Regulation 91-507 to help Canada achieve its broader G20 commitment to regulate over-the-counter (OTC) derivatives following the 2008 financial crisis.

Regulation 91-506

Regulation 91-506 main purpose is to define the types of derivatives that will not be subject to DR obligation described under Part 3 of Regulation 91-507 and will apply initially only for the purpose of the application of Regulation 91-507.  The contracts and instruments excluded under Regulation 91-506 are contracts or instruments that have not traditionally been considered to be over-the-counter derivatives.

Regulation 91-506 adopted by the AMF is a slimmed down version of its Ontario and Manitoba equivalent given that many of the contracts or instruments excluded in the Ontario and Manitoba instruments are already considered “excluded” contracts and instruments under either section 4 or section 6 of the Derivatives Act (Québec) (QDA).  Taking into account Regulation 91-506 and the QDA, these “excluded” contracts and instruments include:

  • gaming and insurance contracts where such contracts are regulated by a domestic or an equivalent foreign regulatory regime;
  • currency exchange contracts provided that the contract (i) settles within prescribed timelines; (ii) is intended by the counterparties to be settled by delivery of the currency referenced in the contract; and (iii) is not rolled-over;
  • commodity forwards contracts provided that physical delivery of the commodity is intended and the contract does not permit cash settlement in the ordinary course;
  • evidence of deposit of certain federally and provincially regulated entities;
  • contracts or instruments traded on certain prescribed exchanges;
  • hybrid products which are predominantly security within the meaning of the Securities Act (Québec); and
  • certain listed issuer compensation products where the underlying interest is a stock or share of the issuer.

Regulation 91-507

The purpose of Regulation 91-507 is to improve transparency in the derivatives market and to ensure that recognized TRs operate in a manner that promotes the public interest.  Regulation 91-507 can be divided into two main parts: the first one dealing with TR recognition and ongoing requirements and the second part dealing with DR.

Trade Repository Recognition and Ongoing Requirements

Part 2 of Regulation 91-507 contains rules for recognition of a TR and the ongoing requirements required of a recognized TR and are in addition to certain rules already contained in the QDA dealing with recognized regulated entities[2].

These rules deal generally with: (i) the requirement for a TR to have a clear established legal framework covering each material aspect of its business; (ii) governance rules, board composition and expertise, management required skills set and duties and responsibilities of the Chief Compliance Officer of the TR; (iii) risk management including general business risk and operational risk management; (iv) data security, integrity and confidentiality; and (v) outsourcing of certain services or systems by TRs.

Part 4 of Regulation 91-507 deals with the communication of certain derivatives data by the TR to: (i) the AMF; (ii) counterparties; and (iii) the public. Regulation 91-507 requires that a recognized TR conforms to internationally accepted regulatory access standards applicable to TR such as the one currently being developed by the Committee on Payment and Settlement Systems of the Bank for International Settlements and IOSCO.  Such communication will be accessible at no cost and, in the case of derivatives data accessible by the public, available on the TR’s website.  Appendix A to Regulation 91-507 provides a list of the type of information that will be accessible to the public.  Such public information includes: currency of denomination, geographic location of the underlying reference entity, asset class of reference entity, product type, whether the product is cleared or uncleared and maturity.

Data Reporting

Part 3 of Regulation 91-507 deals with reporting obligations of transactions involving derivatives (both OTC and derivatives cleared through a clearing agency, but not traded on an exchange) and provides guidelines to identify which counterparty, will be subject to the duty to report, determine the timing of such report and the data to report.

Section 25 of Regulation 91-507 provides a hierarchy to follow in order to determine which of the counterparty is responsible to report the trade.  Generally, a local counterparty defined in Regulation 91-507 to be a person organized under the laws of Québec or that has its head office or principal place of business in Québec or a registered dealer under the QDA, will be required to report the transaction or trade.  Regulation 91-507 also adopts the principle that the counterparty to the transaction that is best suited to fulfill the reporting obligation should be the reporter of the trade.  For example, for trades that are cleared through a recognized or exempt clearing house, the clearing house is best positioned to report derivatives data and is therefore required to act as reporting counterparty discharging the local counterparty from its obligation to report.  If no clearing house is involved but at least one trader is involved, the trader will be responsible to report.  If two local counterparties are involved in a transaction both of them will technically be subject to the obligation to report although the regulator assumes that one of them will delegate to the other through agreement its obligation to report the trade. If the reporting party to a trade is a non-local counterparty and fails to report then the local counterparty to the trade must act as the reporting counterparty and fulfil the failing reporting party reporting obligation.  The AMF is of the view that, because a registered foreign dealer is considered a local counterparty under Regulation 91-507, there will only be limited situations where the above situation occurs.

The AMF expects that a local counterparty will determine that the non-local reporting counterparty has discharged its reporting obligations by reviewing a confirmation of the transaction report.  Where the local counterparty has not received confirmation that its transaction has been reported in accordance with the requirements of Regulation 91-507 within two business days after the transaction date, the local counterparty involved in the transaction will be required to report the transaction no later than the end of the third business day after the day on which the reporting should have occurred.

Under Regulation 91-507, the reporting counterparty will be required to disclose (i) initial creation data (i.e. the information required by Appendix A of Regulation 91-507); (ii) life-cycle event data (i.e. changes to the initial creation data during the life of the derivative); and (iii) valuation data (i.e. the information required under Part E of Appendix A to Regulation 91-507) to the same recognized trade repository throughout the life of the derivative.  The purpose of this requirement is to ensure that the AMF will have access to all reported derivatives data for a particular transaction from the same entity.  Transactions which are not accepted for reporting by any recognized trade repository will need to be electronically submitted to the AMF.

Initial creation data should be reported in real time or as soon as technologically practicable after the execution of a transaction but in any event no later than by the end of the business day following the execution of the transaction.

Life-cycle event data are not required to be reported in real time but rather at the end of the business day on which the life-cycle event occurs.  Multiple life-cycle events that occurred on a given day may be reported all together at the end of the business day on which they occurred.

Regulation 91-507 provides for differing frequency of valuation data reporting based on the type of entity that is reporting counterparty.  For example, the frequency will be daily if the reporting counterparty is a derivatives dealer or a recognized or exempt clearing house and quarterly and no later than 30 days after the end of the calendar quarter (calculated as of the last day of each calendar quarter) in all other cases.

Reporting counterparty must keep transaction records for the life of each transaction and for an additional 7-year period afterwards.  Transaction records must be kept in a safe location and in a durable form.

The ultimate goal of the transaction data collection is to enable the AMF to obtain from recognized trade repository direct, continuous and timely electronic access to derivative transaction data in an individual and aggregated form.  This will allow the AMF to, among other things, protect against unfair, improper or fraudulent practices, foster fair and efficient capital markets, promote confidence in the capital markets and address systemic risk which may arise from the use of derivatives and in particular OTC derivatives.

Under Regulation 91-507, each counterparty to a transaction will be deemed to have consented to the release of all derivatives data resulting from its trading in derivatives despite any agreement to the contrary entered between the counterparties to the transaction.

[1]  However, a reporting counterparty which is not a dealer will not be required to DR until September 30, 2014.  Also, a transaction entered into before July 2, 2014 and that expires or terminates on or before December 31, 2014 will not be subject to DR.

[2] See sections 26 to 31 of the QDA.


Bernard Blouin

Bruno Caron

Benoît Gascon

Brent J. Muir

Alain Laplante

Susan Han
Associate Counsel