The Canadian Securities Administrators (the “CSA”) have enacted new regulations[1] (the “Instrument”) that impose business conduct standards (the “Standards”) on a wide range of parties that engage in trading in derivatives, or giving advice with respect to derivatives. Previously, activities involving derivatives were subject to far less regulation in Canada than activities involving securities. The new Standards came into effect on September 28, 2024, subject to certain transition periods.
Subject to available exemptions, firms are currently required to register under Canadian securities laws when providing advice in respect of securities, such as stocks and bonds. The Standards apply to firms giving advice to clients concerning derivatives. The term “derivative” is defined broadly in the securities legislation of each Canadian jurisdiction and includes, for example, swaps, forward agreements and other over-the-counter instruments. In each case, the broad definition is modified, where applicable, by additional local derivative product determination rules.
A registered firm can satisfy some (but not all) of the Standards by modifying its current policies and procedures regarding securities-related advice so that they also apply to derivatives-related advice.
A firm also is exempt from some of the Standards to the extent that it advises certain types of institutional investors (“Eligible Derivatives Parties” or “EDPs”). This exemption is somewhat similar to those available to the firm when giving securities-related advice to permitted clients.
Does Your Firm Need an Additional Registration With the CSA?
No new registrations are required. The Instrument does not introduce a new requirement to become registered with a member of the CSA as a derivatives adviser.[2]
Under the Instrument, a person is a derivatives adviser – and therefore potentially subject to the Standards – if it satisfies a “business trigger”. Similar to the test for being an “adviser” of securities, a “derivatives adviser” is a person or company engaging in or holding itself out as engaging in the business of advising others in respect of derivatives. Unlike equivalent regulations relating to securities, the Instrument will apply to all parties that are a derivatives adviser with no requirement for them to register as such with the CSA.
While the CSA, other than the Autorité des marchés financiers, continue to work on a regime for the registration of derivatives dealers and derivatives advisers, it is not essential that the CSA implement such a registration regime in order to impose the Standards. There have been no recent developments regarding the derivatives registration regime. Consequently, at this time, it is unclear when – or if – proposals for such a derivatives registration regime will come into effect.
Though there is no new derivatives registration requirement, the Standards nonetheless apply to a firm if it satisfies the business trigger for a derivatives adviser. If yes, then the firm must consider how it will modify its existing policies and procedures to comply with the Instrument.
How Do the Standards Compare to Equivalent Requirements for Securities-Related Advice?
Below is a table of concordance for the Standards imposed by the Instrument for derivatives-related advice and the equivalent requirements for securities-related advice generally found in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (“NI 31-103”). For comparison purposes, the table below also indicates when a similar requirement exists in the Québec Derivatives Act (the “QDA”) or its regulation.[3]
| Standards (Instruments)[4] | Securities Requirements | QDA |
| Fair Dealing (Section 9) |
Local securities legislation[5] |
64, 65 |
| Conflicts of Interest (Section 10) | 13.4 – 13.6 |
67, 71 |
| Client Identification (Section 11) |
13.2(2)(a)-(b), 13.2(3) | 65 |
| Handling Complaints (Section 12) | 13.15 |
74-77.4 |
| Tied-Selling (Section 13) | 11.7 – 11.8 |
Regulation, 11.1 |
| Know-Your-Client (Section 14) |
13.2(2)(c) |
65 |
| Suitability (Section 15) |
13.3 |
65 |
| Referral arrangements (sections 16-18) |
13.7-13.10 |
Regulation, 11.1 |
| Relationship Disclosure (Section 19) |
14.2 |
69 and Regulation, 11.1 |
| Segregation of Client Assets (Section 25) |
14.5.3(b) |
72 |
| Margin (Sections 26-27) | 14.5.2 – 14.6.2 |
69(3) |
| Quarterly Account Statements (Section 29) |
14.14 |
Regulation, 11.1 |
| Policies & Procedures (Section 31) |
11.1 |
Regulation, 11.1 |
| Account Agreement (Section 34) |
11.5(2)(k) |
Regulation, 11.1 |
| Recordkeeping (Sections 35-36) |
11.5 – 11.6 |
61 |
In many cases, the derivatives-related Standards are identical to their securities-related counterparts. However, this is not always the case. When developing new policies and procedures, or modifying existing policies and procedures, the exact description of the Standards in the Instrument must be carefully reviewed.
Which Standards Can Be Met by Modifying Existing Policies and Procedures for Securities-Related Advice?
The Instrument exempts a registered portfolio manager from certain – but not all – Standards if the firm adapts and follows its equivalent policies and procedures for securities-related advice.[6] The specific Standards that are eligible for this exemption are set out below.
| Standards (Instruments) |
Securities Requirements (NI 31-103) |
| Handling Complaints (Section 12) |
13.15 |
| Tied-Selling (Section 13) |
11.7 – 11.8 |
| Know-Your-Client (Section 14) |
13.2(2)(c) |
| Suitability (Section 15) |
13.3 |
| Referral arrangements (sections 16-18) |
13.7-13.10 |
| Relationship Disclosure (Section 19) |
14.2 |
| Segregation of Client Assets (Section 25) |
14.5.3(b) |
| Margin (Sections 26-27) |
14.5.2 – 14.6.2 |
| Quarterly Account Statements (Section 29) |
14.14 |
| Account Agreement (Section 34) |
11.5(2)(k) |
| Recordkeeping (Sections 35-36) |
11.5 – 11.6 |
The Standards that are not eligible for this exemption – and therefore require new policies and procedures specific to derivatives – are set out below.
| Standards (Instrument) | Securities Requirements (NI 31-103) |
| Fair Dealing (Section 9) |
Local securities legislation |
| Conflicts of Interest (Section 10) |
13.4 – 13.6 |
| Client Identification (Section 11) |
13.2(2)(a)-(b), 13.2(3) |
| Policies & Procedures (Section 31) |
11.1 |
Who Is an Eligible Derivatives Party?
Similar to the treatment of “permitted clients” under securities legislation, a firm is entitled to treat EDPs differently from other clients due to the sophistication of EDPs. The scope of EDPs is very similar – but not identical – to that of permitted clients. See Appendix A to this bulletin for a side-by-side comparison of the definitions of “Eligible Derivatives Party” and “permitted client”. Note that investment funds with a registered investment fund manager qualify as EDPs. By operation of blanket orders across Canada, a firm also can treat an investment fund as an EDP if the investment fund is managed or advised by the foreign equivalent of an investment fund manager or portfolio manager.[7]
Which Standards Can Be Waived by Eligible Derivatives Parties?
Similar to permitted clients, certain Standards do not necessarily apply to EDPs. The Instrument clearly distinguishes between the Standards which cannot be waived by EDPs (the “core requirements”) and the Standards which automatically do not apply to – or can be waived by – EDPs. The Standards highlighted in the table below are the core requirements that apply even to EDPs:
| Standards (Instrument) |
Securities Requirements (NI 31-103) |
| Fair Dealing (Section 9) |
Local securities legislation |
| Conflicts of Interest (Section 10) |
13.4 – 13.6 |
| Client Identification (Section 11) |
13.2(2)(a)-(b), 13.2(3) |
| Handling Complaints (Section 12) |
13.15 |
| Tied-Selling (Section 13) |
11.7 – 11.8 |
| Know-Your-Client (Section 14) |
13.2(2)(c) |
| Suitability (Section 15) |
13.3 |
| Referral arrangements (sections 16-18) |
13.7-13.10 |
| Relationship Disclosure (Section 19) |
14.2 |
| Segregation of Client Assets (Section 25) |
14.5.3(b) |
| Margin (Sections 26-27) |
14.5.2 – 14.6.2 |
| Quarterly Account Statements (Section 29) |
14.14 |
| Policies & Procedures (Section 31) |
11.1 |
| Account Agreement (Section 34) |
11.5(2)(k) |
| Recordkeeping (Sections 35-36) | 11.5 – 11.6 |
The treatment of permitted clients and EDPs also differs in how these exemptions for non-core requirements are accessed:
- Under NI 31-103, some of the corresponding requirements automatically do not apply, others must be waived in writing, and some cannot be waived.
- Under the Instrument, the non-core requirements automatically do not apply (i.e. no waiver is required) to all EDPs that are not individuals or eligible commercial hedgers.
- EDPs that are individuals or eligible commercial hedgers must expressly waive each non-core requirement.
Are There Transition Periods?
The Instrument contains two important transition provisions which are explained below.
Transition to “Eligible Derivatives Party” Definition
During a five year transition period that will end on September 28, 2029, a client is deemed to be an “Eligible Derivatives Party” if, prior to September 28, 2024, the client represented to the firm that the client is a “permitted client” or, in some circumstances, an “accredited investor”, an “accredited counterparty” or a “qualified party”.[8] The firm also may, through its own due diligence, satisfy itself on a reasonable basis that the client is deemed to be an Eligible Derivatives Party during the transition period. The purpose of this transition period is to provide firms with five years to obtain new representations from existing clients under the Instrument. See Appendix B to this bulletin for a full list of the current representations that are sufficient for a client to be deemed an Eligible Derivatives Party during the five year transition period.
Waivers by Certain EDPs
Notwithstanding that the Instrument came into effect on September 28, 2024, a firm has an additional year (e.g. until September 28, 2025) to obtain from its EDP clients that are individuals and eligible commercial hedgers their waivers of the non-core Standards.[9]
What Next Steps Should a Registered Portfolio Manager Take?
If it has not already done so, we recommend that each registered portfolio manager commence updating its policies and procedures to address the requirements of the Instrument. Fasken would be pleased to assist you with those updates.
We also recommend that each registered portfolio manager watch for updates from Fasken regarding any guidance from the CSA regarding interpretation or implementation of the Standards as regulations concerning trading in, or advising on, derivatives will continue to evolve.[10]
Because the application of the Standards of the Instrument does not hinge on registration status, it is now unclear when or if the previously proposed National Instrument 93-102 – Derivatives: Registration will move forward. We recommend that each firm watch for future updates from Fasken regarding these proposed registration requirements.
Appendix A[11]
Comparison of “Eligible Derivatives Party” and “Permitted Client”
| “Eligible Derivatives Party” means, for a derivatives party of a derivatives firm, any of the following: | “permitted client” means any of the following: |
| a) a Canadian financial institution; |
a) a Canadian financial institution or a Schedule III bank; |
| b) the Business Development Bank of Canada continued under the Business Development Bank of Canada Act (Canada); |
b) the Business Development Bank of Canada incorporated under the Business Development Bank of Canada Act (Canada); |
| c) a subsidiary of a person or company referred to in paragraph a) or b), if the person or company owns all of the voting securities of the subsidiary, except the voting securities required by law to be owned by directors of the subsidiary; |
c) a subsidiary of any person or company referred to in paragraph a) or b), if the person or company owns all of the voting securities of the subsidiary, except the voting securities required by law to be owned by directors of the subsidiary; |
|
d) a person or company registered under the securities legislation of a jurisdiction of Canada as any of the following: i) a derivatives dealer; ii) a derivatives adviser; iii) an adviser; iv) an investment dealer; |
d) a person or company registered under the securities legislation of a jurisdiction of Canada as an adviser, investment dealer, mutual fund dealer or exempt market dealer; |
| e) a pension fund that is regulated by the federal Office of the Superintendent of Financial Institutions or a pension commission or similar regulatory authority of a jurisdiction of Canada or a wholly-owned subsidiary of the pension fund; |
e) a pension fund that is regulated by either the federal Office of the Superintendent of Financial Institutions or a pension commission or similar regulatory authority of a jurisdiction of Canada or a wholly-owned subsidiary of such a pension fund; |
| f) an entity organized under the laws of a foreign jurisdiction that is analogous to any of the entities referred to in paragraphs a) to e); |
f) an entity organized in a foreign jurisdiction that is analogous to any of the entities referred to in paragraphs a) to e); |
| g) the Government of Canada or the government of a jurisdiction of Canada, or any crown corporation, agency or wholly-owned entity of the Government of Canada or the government of a jurisdiction of Canada; |
g) the Government of Canada or a jurisdiction of Canada, or any Crown corporation, agency or wholly-owned entity of the Government of Canada or a jurisdiction of Canada; |
| h) a government of a foreign jurisdiction or any agency of that government; |
h) any national, federal, state, provincial, territorial or municipal government of or in any foreign jurisdiction, or any agency of that government; |
| i) a municipality, public board or commission in Canada and a metropolitan community, school board, the Comité de gestion de la taxe scolaire de l’île de Montréal or an intermunicipal management board in Québec; |
i) a municipality, public board or commission in Canada and a metropolitan community, school board, the Comité de gestion de la taxe scolaire de l'île de Montréal or an intermunicipal management board in Québec; |
| j) a trust company or trust corporation registered or authorized to carry on business under the Trust and Loan Companies Act (Canada) or under comparable legislation in a jurisdiction of Canada or a foreign jurisdiction, acting on behalf of a managed account managed by the trust company or trust corporation, as the case may be; |
j) a trust company or trust corporation registered or authorized to carry on business under the Trust and Loan Companies Act (Canada) or under comparable legislation in a jurisdiction of Canada or a foreign jurisdiction, acting on behalf of a managed account managed by the trust company or trust corporation, as the case may be; |
|
k) a person or company that is acting on behalf of a managed account if the person or company is registered or authorized to carry on business as either of the following: i) an adviser or a derivatives adviser in a jurisdiction of Canada; ii) the equivalent of an adviser or a derivatives adviser under the securities legislation of a jurisdiction of Canada or a foreign jurisdiction; |
k) a person or company acting on behalf of a managed account managed by the person or company, if the person or company is registered or authorized to carry on business as an adviser or the equivalent under the securities legislation of a jurisdiction of Canada or a foreign jurisdiction; |
|
l) an investment fund if either of the following apply: i) the investment fund is managed by a person or company registered as an investment fund manager under the securities legislation of a jurisdiction of Canada; ii) the investment fund is advised by an adviser registered or exempted from registration under securities legislation or under commodity futures legislation of a jurisdiction of Canada; |
l) an investment fund if one or both of the following apply: i) the fund is managed by a person or company registered as an investment fund manager under the securities legislation of a jurisdiction of Canada; ii) the fund is advised by a person or company authorized to act as an adviser under the securities legislation of a jurisdiction of Canada; |
|
[by operation of blanket orders:] An investment fund that is: i) managed by the equivalent of a registered or authorized investment fund manager under the securities legislation or under the commodities futures legislation of a foreign jurisdiction, or; ii) advised by the equivalent of a registered or authorized adviser under the securities legislation or under the commodities futures legislation of a foreign jurisdiction; |
|
| m) a person or company, other than an individual, that has net assets of at least $25,000,000 as shown on its most recently prepared financial statements; |
q) a person or company, other than an individual or an investment fund, that has net assets of at least $25,000,000 as shown on its most recently prepared financial statements; |
| n) a person or company that has represented to the derivatives firm, in writing, that it is a commercial hedger in relation to the derivatives that it transacts with the derivatives firm; |
|
|
o) an individual that beneficially owns financial assets, as defined in section 1.1 of National Instrument 45-106 Prospectus Exemptions, that have an aggregate realizable value before tax but net of any related liabilities of at least $5,000,000; |
o) an individual who beneficially owns financial assets, as defined in section 1.1 of National Instrument 45-106 Prospectus Exemptions, having an aggregate realizable value that, before taxes but net of any related liabilities, exceeds $5,000,000; |
| p) a person or company, other than an individual, that has represented to the derivatives firm, in writing, that its obligations under derivatives that it transacts with the derivatives firm are fully guaranteed or otherwise fully supported, under a written agreement, by one or more derivatives parties referred to in this definition, other than a derivatives party referred to in paragraph n) or o); |
|
| q) a qualifying clearing agency; |
|
| m) in respect of a dealer, a registered charity under the Income Tax Act (Canada) that obtains advice on the securities to be traded from an eligibility adviser, as defined in section 1.1 of National Instrument 45-106 Prospectus Exemptions, or an adviser registered under the securities legislation of the jurisdiction of the registered charity; |
|
| n) in respect of an adviser, a registered charity under the Income Tax Act (Canada) that is advised by an eligibility adviser, as defined in section 1.1 of National Instrument 45-106 Prospectus Exemptions, or an adviser registered under the securities legislation of the jurisdiction of the registered charity; |
|
| p) a person or company that is entirely owned by an individual or individuals referred to in paragraph o), who holds the beneficial ownership interest in the person or company directly or through a trust, the trustee of which is a trust company or trust corporation registered or authorized to carry on business under the Trust and Loan Companies Act (Canada) or under comparable legislation in a jurisdiction of Canada or a foreign jurisdiction; |
|
| r) a person or company that distributes securities of its own issue in Canada only to persons or companies referred to in paragraphs a) to q); |
Appendix B
(Representation obtained prior to September 28, 2024 deeming a client to be an “Eligible Derivatives Party” during the five year transition period)
The Canadian counterparty has represented that it is:
a) permitted client, as that term is defined in NI 31-103;
b) in Ontario, an accredited investor, other than an individual, as that term is defined in National Instrument 45-106 Prospectus Exemptions;
c) an accredited counterparty, as that term is defined in the Derivatives Act (Québec);
d) a qualified party, as that term is defined in any of the following:
i) in Alberta, Blanket Order 91-507 Over-the-Counter Trades in Derivatives;
ii) in British Columbia, Blanket Order 91-501 Over-the-Counter Derivatives;
iii) in Manitoba, Blanket Order 91-501 Over-the-Counter Trades in Derivatives;
iv) in New Brunswick, Local Rule 91-501 Over-the-Counter Trades in Derivatives;
v) in Nova Scotia, Blanket Order 91-501 Over-the-Counter Trades in Derivatives;
vi) in Saskatchewan, General Order 91-908 Over-the-Counter Derivatives;
e) an eligible contract participant as that term is defined under Section 1(a)(18) of the United States Commodity Exchange Act;
f) a financial counterparty as that term is defined under Article 2(8) of the European Market Infrastructure Regulation; or
g) a non-financial counterparty as that term is defined under Article 2(9) of, and which exceeds clearing thresholds pursuant to Article 10(4)(b) of, the European Market Infrastructure Regulation.
