ISDA Amend Regulatory Update: Canada Adopts Business Conduct Rules for Derivatives Dealers and Advisors

On September 28th regulatory authorities of Alberta, Saskatchewan, Manitoba, Ontario, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Nunavut, Northwest Territories and Yukon adopted a final rule that sets out a comprehensive regime for regulating the business conduct of dealers and advisers in the over-the-counter (OTC) derivatives market.[1] The rule is entitled Multilateral Instrument 93-101 Derivatives: Business Conduct; Companion Policy.[2]

These efforts by the Canadian Securities Regulators mirror previous efforts to regulate the OTC derivatives market by American, European, and Asian regulators. Canada notably remained the last G20 country without conduct standards for OTC derivatives markets prior to the adoption of 93-101. The final rule will become effective on September 28, 2024.

The main elements of the Business Conduct Rules include provisions related to Fair Dealing; Conflicts of Interest; Know Your Counterparty; Suitability; Reporting Non-Compliance and Recordkeeping. Elements of 93-101 mirror the requirements the regulatory regimes in the United States (following adoption of the Dodd-Frank Act) and the European Union (following adoption of the European Markets Infrastructure Regulation).

As in the United States and Europe, Canadian dealers will be able to rely on the representations of their counterparties when determining if the counterparty is in-scope for the new rules as long as those representations are considered reasonable. 93-101 also incorporates substantial substituted compliance provisions for Swap Dealers registered and regulated by global regulatory regimes considered equivalent by the CSA.[3]

Despite the rules coming into effect one year from the publication of the final rule, there is a significant transition period for existing customers. Firms are given until 2029 to collect updated representations from existing counterparties[4]. This transition period does not apply to counterparties seeking to take advantage of an exemption offered by 93-101, with representations needing to be collected for these counterparties by September 28, 2025.

Given the effective date only being a year away, firms should immediately begin to assess the impact that 93-101 will have on their operations. They will likely have to develop new counterparty onboarding procedures in light of the new rules and conduct substantial customer outreach and education about the rights and disclosures they are entitled to under the new rules.[5]

[1] Collectively the council of the securities regulators of Canada's provinces and territories are known as Canadian Securities Administrators (CSA). The CSA is responsible for coordinating and harmonizing regulations for Canadian capital markets. If all provinces agree to jointly adopt an instrument, that instrument can be considered a national instrument by the CSA.

[2] The British Columbia Securities Commission intends to adopt substantially similar rules at a later date, at which time CSA Staff intends for Multilateral Instrument 93-101 to be converted to a National Instrument.

[3] Australia, Brazil, Hong Kong, Iceland, Japan, Republic of Korea, New Zealand, Norway, Singapore, Switzerland, United States of America, United Kingdom of Great Britain and Northern Ireland, and any member country of the European Union

[4] All new counterparties will have to be in compliance with 93-101 following the effective date of September 28, 2024.

[5] S&P Global Market Intelligence will be partnering with ISDA to develop a new ISDA Canada Representation Letter outlining any regulatory representations required by the new rule which will be made available on the ISDA Amend platform in 2024.

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