The Canadian Securities Administrators today released the latest in a series of consultation papers considering the regulation of derivatives in Canada. Specifically, CSA Consultation Paper 91-407 considers the regulation of derivatives market participants through the implementation of a registration regime.
Under the recommended regime articulated by the paper, three categories of registration would be created, namely those of (i) derivatives dealers, being persons carrying on the business of trading in derivatives or holding themselves out to be carrying on that business; (ii) derivatives advisers, being those carrying on the business of advising others in respect of derivatives, or who hold themselves out to be in that business; and (iii) large derivative participants, being entities, other than derivatives dealers, that have a substantial aggregate derivatives exposure.
Those required to be registered under the proposed regime would then be subject to various requirements respecting such things as proficiency, solvency, honest dealing obligations, and gatekeeper and business conduct requirements in the case of derivatives dealers and advisers. Exemptions from registration requirements would also be available in certain circumstances. For example, clearing agencies would generally not have to register, and foreign derivatives advisers and dealers would be exempted from specific regulatory requirements where they are subject to equivalent requirements in their home jurisdictions.
The paper also recommends that registered entities that have clients or counterparties that rely on their advice be subject to additional registration requirements. Alternative proposals are considered where dealers are trading with non-qualified parties: one that would preclude dealers from entering into trades with counterparties that are non-qualified parties unless the counterparties receive advice from a registered derivatives adviser, and the second that would require that the dealer inform counterparties that are non-qualified that there is a conflict of interest.
According to the paper, if the first alternative is implemented, “representatives dealing with counterparties will not be required to be registered as all counterparties will either be qualified parties or will be represented by independent derivatives advisers.” In the case of the second alternative “a party entering into transactions with counterparties that are non-qualified parties will typically be considered to be in the business of trading derivatives unless that non-qualified party is represented by a derivatives dealer or adviser”. The CSA are seeking input on the appropriate definition of "qualified party". There is also a recommended exemption for crown corporations when dealing with qualified parties and not intermediating any trades.
Under the recommended proposals, an individual would have to register where the person is (i) the ultimate designated person, chief compliance officer or chief risk officer of the registrant; (ii) involved in providing clients with advice relating to derivatives; (iii) involved in providing trading services to clients as an intermediary to a trade; or (iv) involved in a trade with a counterparty that is a non-qualified party that is not represented by an independent derivatives adviser. The individual registration requirements would apply to frontline staff that deal with clients and those that manage or supervise such staff. Where individuals provide clients with advice, they would have to register whether or not the client was a qualified party.
The CSA are accepting comments on the consultation paper, including with respect to a number of specific questions regarding the paper's numerous recommendations, until June 17, 2013.