The Canadian Securities Administrators (the “CSA”) recently 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 with, or giving advice with respect to derivatives to, Canadian clients. 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.
The Standards apply to non-Canadian firms not currently registered under Canadian securities laws if the firm’s trading or advisory activities for Canadian clients include derivatives. The term “derivative” is defined broadly in the securities legislation of each local 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 non-Canadian firm is exempt from the Standards if either:
- it trades in derivatives only with Canadian counterparties that are in the business of trading in derivatives and is trading as principal for its own account (the “foreign liquidity provider exemption”), or
- it only trades with, or gives advice to, certain types of Canadian institutional investors (“eligible derivatives counterparties”) and makes certain filings with the relevant CSA member and/or provides certain disclosure to those Canadian clients (the “foreign firm exemptions”).
In the latter case, the filings and disclosure requirements are similar to those currently followed by the firm in order to be exempt from registration in Canada for trading or advising with respect to securities. As a result, we expect that a non-Canadian firm will need to make, at most, only incremental changes to its practices in order to be exempt from the Standards.
Does the Firm Need to Register With the CSA?
No. The Instrument does not introduce a new requirement to become registered with a member of the CSA as a derivatives dealer or a derivatives adviser.[2]
Similar to the regulation of securities-related activities, a person is a derivatives dealer or a derivatives adviser – and therefore potentially subject to the Standards – if it simply satisfies a “business trigger”. In general terms, a “derivatives dealer” is a person or company engaging in or holding itself out as engaging in the business of trading in derivatives as principal or agent. Similarly, 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 Canadian regulations relating to securities, the Instrument applies to all parties that are a derivatives dealer or a derivatives adviser, regardless of whether they are registered as such with a member of 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 can nonetheless apply to a non-Canadian firm if it satisfies the business trigger to be a derivatives dealer or derivatives adviser. Each firm therefore needs to consider whether it will rely on an exemption from the Standards.
What Are the Conditions of the Exemptions from the Standards?
Foreign Liquidity Provider Exemption[3]
To ensure that Canadian counterparties who are in the business of trading in derivatives for their own account can continue to manage their risk through transactions with non-Canadian firms, any non-Canadian firm is exempt from many of the Standards, provided the Canadian counterparty is either:
- a full-service securities dealer in Canada, or
- another person in Canada in the business of trading in derivatives (in other words, a derivatives dealer),
and, in either case, is trading as principal for its own account.
A firm can qualify for the foreign liquidity provider exemption regardless of the country (the “home jurisdiction”) in which the head office or principal place of business of the firm is located, provided that:
- the home jurisdiction is not Canada,
- the firm is not a Canadian financial institution[4] , and
- the firm is registered (or exempt from registration) to trade in derivatives in its home jurisdiction.[5]
The foreign liquidity provider exemption is available on a transaction-by-transaction basis. However, before relying on the exemption for a transaction, the firm will need to confirm that the Canadian counterparty is a full-service securities dealer or derivatives dealer in Canada. Not all Canadian counterparties will be “derivatives dealers”, nor will they necessarily be trading as principal for their own accounts. The status will depend, in part, on the assessment by each Canadian counterparty of whether it is “in the business of trading in derivatives”. Accordingly, before relying on this exemption, each firm should obtain confirmation in writing from the Canadian counterparty that it is a derivatives dealer trading as principal for its own account.
Foreign Firm Exemptions
The Instrument acknowledges the efficacy of equivalent derivatives business conduct regulation in certain non-Canadian jurisdictions.[6] For a derivatives dealer or a derivatives adviser based in those recognized non-Canadian jurisdictions, the Instrument exempts the firm from all of the requirements of the Instrument[7] – including the Standards – provided the firm satisfies certain requirements that resemble those relating to the international dealer exemption (the “IDE”) and the international adviser exemption (the “IAE”) for securities-related activities currently relied upon by the firm.[8] In general, the most significant of these requirements are the following:
- The head office or principal place of business of the firm is located in a recognized non-Canadian jurisdiction.
- The firm transacts with or advises only “eligible derivatives parties”.
- The firm is registered or otherwise authorized in its home jurisdiction to engage in such activities, and actually engages in such activities.[9]
- A statement containing certain prescribed disclosure is provided to each eligible derivatives party.
- The firm makes certain filings with the relevant CSA.
There also is an exemption for sub-advisory relationships[10] that resembles the international sub-adviser exemption for securities-related activities.[11]
The relevant provisions of the foreign firm exemptions are reproduced in Appendix B to this bulletin.
An “eligible derivatives party” is similar – but not identical – to a “permitted client” used in the IDE and the IAE for securities-related activities. See Appendix C to this bulletin for a side-by-side comparison of the definitions of “eligible derivatives party” and “permitted client”.
During a five year transition period that will end on September 28, 2029, every Canadian counterparty will be deemed to be an “eligible derivatives party”, provided the non-Canadian firm obtained from the Canadian counterparty, before September 28, 2024, a representation that the Canadian counterparty is a “permitted client” or, in some circumstances, an “accredited investor”, an “accredited counterparty”, or a “qualified party”.[12] The purpose of this transition period is to provide derivatives dealers with five years to obtain new representations under the Standards from Canadian counterparties that previously represented their sophisticated status before the Standards came into effect. See Appendix D to this bulletin for a full list of the current representations that are sufficient in order for a Canadian counterparty to be deemed an eligible derivatives party during the five year transition period.
Non-Canadian firms that currently limit their activities to Canadian clients that are permitted clients typically have obtained a representation to that effect from each Canadian client. Based on the foregoing, a non-Canadian firm will be eligible to rely on the aforementioned exemptions in the Instrument, such that the Standards will have no application to it.
What Next Steps Should Non-Canadian Firms Take?
What Should Non-Canadian Firms Monitor in the Future?
Canadian regulations concerning trading in, or advising on, derivatives will continue to evolve through guidance from the CSA.[13] We recommend that each non-Canadian firm watch for future updates from Fasken regarding any modifications to the conditions for reliance on the exemptions from the Standards.
Because the application of the Standards of the Instrument do not hinge on registration status, it remains unclear when or if the previously proposed National Instrument 93-102 – Derivatives: Registration will move forward. We recommend that each non-Canadian firm watch for future updates from Fasken regarding these proposed registration requirements.
Appendix A
(Recognized Non-Canadian Jurisdictions)
- 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
- Any member country of the European Union
Appendix B
(Full Text of Exemptions)
Exemption for Foreign Derivatives Dealers
39. (1) A derivatives dealer whose head office or principal place of business is in a foreign jurisdiction specified in Appendix A [to the Instrument] is exempt from the provisions in this Instrument if all of the following apply:
(a) the derivatives dealer transacts only with, for or on behalf of, a person or company in the local jurisdiction that is an eligible derivatives party;
(b) the derivatives dealer is registered, licensed or authorized under the securities, commodity futures or derivatives legislation of a foreign jurisdiction specified in Appendix A [to the Instrument] to conduct the derivatives activities in the foreign jurisdiction that it proposes to conduct with the derivatives party;[14]
(c) the derivatives dealer is subject to and complies with the securities, commodity futures or derivatives legislation of the foreign jurisdictions specified in Appendix A [to the Instrument] relating to the activities being conducted by the derivatives dealer with a derivatives party whose head office or principal place of business is in Canada;[15]
(d) the derivatives dealer provides the regulator or, in Québec, the securities regulatory authority, with prompt access to its books and records upon request with respect to any matter relating to the activities being conducted with a derivatives party whose head office or principal place of business is located in Canada.
(2) The exemption under subsection (1) is not available unless all of the following apply:
(a) the derivatives adviser engages in the business of a derivatives adviser in the foreign jurisdiction in which its head office or principal place of business is located;
(b) the derivatives adviser has delivered to the derivatives party a statement in writing disclosing the following:
(i) the foreign jurisdiction in which the derivatives adviser’s head office or principal place of business is located;
(ii) that all or substantially all of the assets of the derivatives adviser may be situated outside of the local jurisdiction;
(iii) that there may be difficulty enforcing legal rights against the derivatives adviser because of the above;
(iv) the name and address of the agent for service of process of the derivatives adviser in the local jurisdiction.
(c) the derivatives adviser has submitted to the regulator or, in Québec, the securities regulatory authority, a completed Form 93-101F1 Submission to Jurisdiction and Appointment of Agent for Service of Process;
Exemption for Foreign Derivatives Advisers
46. (1) A derivatives adviser whose head office or principal place of business is in a foreign jurisdiction specified in Appendix D [to the Instrument] is exempt from the provisions of this Instrument in respect of advice provided to a derivatives party if all of the following apply:
(a) the derivatives party to whom the advice is being provided is an eligible derivatives party;
(b) the derivatives adviser is registered, licensed or authorized, or otherwise operates under an exemption from registration, under the securities, commodity futures or derivatives legislation of a foreign jurisdiction specified in Appendix D [to the Instrument] to conduct the derivatives activities in the foreign jurisdiction that it proposes to conduct with the derivatives party;
(c) the derivatives adviser is subject to and complies with the securities, commodity futures or derivatives legislation of the foreign jurisdictions specified in Appendix D [to the Instrument] relating to the activities being conducted by the derivatives adviser with a derivatives party whose head office or principal place of business is in Canada;
(d) the derivatives adviser provides the regulator or, in Québec, the securities regulatory authority, with prompt access to its books and records upon request with respect to any matter relating to the activities being conducted with a derivatives party whose head office or principal place of business is in Canada.
(2) The exemption under subsection (1) is not available unless all of the following apply:
(a) the derivatives adviser engages in the business of a derivatives adviser in the foreign jurisdiction in which its head office or principal place of business is located;
(b) the derivatives adviser has delivered to the derivatives party a statement in writing disclosing the following:
(i) the foreign jurisdiction in which the derivatives adviser’s head office or principal place of business is located;
(ii) that all or substantially all of the assets of the derivatives adviser may be situated outside of the local jurisdiction;
(iii) that there may be difficulty enforcing legal rights against the derivatives adviser because of the above;
(iv) the name and address of the agent for service of process of the derivatives adviser in the local jurisdiction.
(c) the derivatives adviser has submitted to the regulator or, in Québec, the securities regulatory authority, a completed Form 93-101F1 Submission to Jurisdiction and Appointment of Agent for Service of Process;
(3) A derivatives adviser that relied on the exemption under subsection (1) during the 12-month period preceding December 1 of a year must notify the regulator or, in Québec, the securities regulatory authority, of that fact by December 1 of that year.
(4) In Ontario, subsection (3) does not apply to a derivatives adviser that complies with the filing and fee payment provisions applicable to an unregistered exempt international firm under Ontario Securities Commission Rule 13-502 Fees.
Exemption for Foreign Derivatives Sub-Advisers
47. (1) A derivatives sub-adviser whose head office or principal place of business is in a foreign jurisdiction specified in Appendix E [to the Instrument] is exempt from the provisions of this Instrument if all of the following apply:Appendix C
(Comparison of “Eligible Derivatives Party” and “permitted client”)[18]
| “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; |
| (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 D
(Representation obtained prior to September 28, 2024 deeming a Canadian counterparty 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;
