In our blog post of March 11, 2011, we discussed the proposed repeal by the Alberta Securities Commission of Blanket Order 91-503 and its replacement with Rule 91-505 Over-the-Counter Derivatives. At the time, and in the context of ongoing efforts by the Canadian Securities Administrator to bring the regulation of OTC derivatives within the four corners of securities legislation to comply with G20 commitments, the proposed Rule 91-505 would have resulted in OTC derivatives and commodity futures contracts being considered "futures contracts" under the Securities Act (Alberta). Historically, under BO 91-503, such OTC derivatives and commodity futures contracts were exempted from the definition of “futures contract” and thereby not considered “securities” under the Securities Act.
In the context of the sea change in regulatory philosophy being undertaken by the CSA and reflected in proposed Rule 91-505, only a narrow registration exemption was proposed for OTC physical commodity contracts. The proposed Rule would have abandoned the current concept of prospectus and registration relief for a broad array of OTC transactions and commodity contracts between qualified parties.
In response to a number of comment letters and pursuant to ongoing attempts to harmonize the approach to derivatives regulation across Canada, the ASC on October 15, 2012 posted a revised Rule 91-505. While retaining the concept of bringing the regulation of futures contracts within the Securities Act and the exemption for physically settled OTC commodity contracts, the revised Rule 91-505 also reintroduces the concept of “qualified parties” and creates an exemption from the prospectus and registration requirements for all futures contracts where each party is a qualified party. As such, the revised Rule 91-505 is in this respect in keeping with the nature of the exemptions provided by Blanket Order 91-503, albeit drawing the regulation of OTC transactions back within the Securities Act.
One other important feature to note, and which reflects a nod to the CSA’s ongoing consultation process on OTC derivatives regulation, is the introduction of a number of potential future obligations in relation to such trades, including: (a) trade reporting; (b) trading/clearing of such OTC derivatives through a recognized exchange or clearing agency; and (c) minimum excess working capital requirements. The imposition of those requirements, if they proceed, will reflect the culmination of the CSA’s current consultative process.
The ASC is accepting comments on revised Rule 91-505 until November 16, 2012, which would suggest a desired effective date of Rule 91-505 as early as January 1, 2013.