Proposed Amendments to OSC Rule 91-507 Trade Repositories and Derivatives Data Reporting and Proposed Changes to OSC Companion Policy 91-507CP and Proposed Changes to OSC Companion Policy 91-506CP

Introduction

The Ontario Securities Commission (the OSC, the Commission or we) is publishing for comment for a period of 120 days, expiring on October 7, 2022:

1. proposed amendments to OSC Rule 91-507 Trade Repositories and Derivatives Data Reporting (the Trade Reporting Rule);
2. proposed changes to OSC Companion Policy 91-507CP (the Trade Reporting CP) to the Trade Reporting Rule;
3. proposed changes (the Proposed Product Determination Changes) to OSC Companion Policy 91-506CP (the Product Determination CP) to OSC Rule 91-506 Derivatives: Product Determination (the Product Determination Rule).

Collectively, the proposed amendments to the Trade Reporting Rule and the proposed changes to the Trade Reporting CP are referred to as the Proposed Trade Reporting Amendments. We are issuing this Notice to solicit comments on the Proposed Trade Reporting Amendments and the Proposed Product Determination Changes. We welcome all comments on this publication and have also included specific questions in the Request for Comments section.

Substance and Purpose

The Proposed Trade Reporting Amendments have been developed in response to coordinated international efforts to streamline and harmonize derivatives data reporting standards.

Global harmonization of data reporting standards will significantly reduce regulatory burden by enabling market participants to take a more consistent approach to compliance. The Trade Reporting Rule currently includes data elements that are not precisely described and are not standardized across global regulators. This has three important consequences. First, it results in regulatory burden for market participants who report data to multiple global regulators, as they must provide distinct data elements to each regulator. Second, it results in market participants reporting more data than necessary because they may be unsure what is required under certain data elements. Third, it results in inconsistent data for the Commission and the public. By harmonizing and clarifying both the data elements and the technical format and values for reporting, we will reduce burden on market participants by reducing the data that they provide and enabling them to harmonize their reporting systems across multiple global regulators. This should reduce the complexity of their reporting systems and decrease ongoing operational and compliance costs involved in interpreting and monitoring global reporting requirements, while at the same time strengthening the quality of the data.

Improvements to data quality (including the accuracy and consistency of data) promote confidence in Ontario’s capital markets by improving transparency in the derivatives market and enabling the Commission to more effectively:

• provide oversight of the emergence of risks and vulnerabilities that can threaten the stability of Ontario’s capital markets and the financial system,
• identify challenges (such as access to liquidity, market fragmentation, and trends in price formation) that may impede market efficiency,
• identify opportunities to strengthen and increase the competitiveness of Ontario markets, and improve policy development, and
• monitor markets for market manipulation and other fraudulent trading activity that can harm investors.

In particular, the Proposed Trade Reporting Amendments update the data elements that are required to be reported under the Trade Reporting Rule. These updated data elements, together with their definition, format, and usage, have been harmonized with global guidance developed by the Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) working group for the harmonization of key over-the-counter (OTC) derivatives data elements (the CPMI-IOSCO Working Group), with significant participation from the OSC. Harmonized data elements include the Unique Transaction Identifier (a unique identifier for each transaction) (UTI), the Unique Product Identifier (a unique identifier for each product) (UPI), and other critical data elements reflected in Appendix A to the Trade Reporting Rule.¹

In addition to harmonizing data reporting standards, the Proposed Trade Reporting Amendments will introduce other notable changes, including:

• certain structural changes to the Trade Reporting Rule, such as a more flexible reporting hierarchy for non-dealers;
• increased harmonization and alignment with domestic derivatives regulation and policy-making, such as a harmonized threshold in the commodity derivatives exclusion for non-dealers and a harmonized definition of “affiliated entity”;
• updated trade repository governance, risk and operational requirements to align with international standards;
• improvements that are designed to enhance data accuracy and consistency, such as data validation and verification, similar to other global regulators;
• clearer guidance for market participants through a new administrative technical manual and a substantial redraft of the Trade Reporting CP.

The purpose of the Proposed Product Determination Changes is to clarify the current interpretation that, similar to other financial commodities that do not come within the exclusion in paragraph 2(1)(d) of the Product Determination Rule, certain crypto assets that are also “financial commodities” do not fall under the exclusion in paragraph 2(1)(d) of the Product Determination Rule.

Background

The Product Determination Rule and the Trade Reporting Rule became effective on December 31, 2013. ²

Based on feedback from various market participants, international developments, and in order to more effectively and efficiently promote the underlying policy goals, the Commission is proposing to further amend the Trade Reporting Rule and make changes to the Trade Reporting CP and Product Determination CP. The details of the Proposed Trade Reporting Amendments and the Proposed Product Determination Changes are discussed below.

Summary of Proposed Trade Reporting Amendments

In drafting the Proposed Trade Reporting Amendments, we aimed to reduce regulatory burden for market participants subject to the Trade Reporting Rule while achieving necessary regulatory goals. We believe the Proposed Trade Reporting Amendments achieve this goal by harmonizing data reporting requirements under the Trade Reporting Rule with updates to international data reporting standards. Notably, these amendments will minimize the regulatory burden for many market participants that report transactions globally, as the data elements under the Trade Reporting Rule will correspond with data elements in other jurisdictions. Similarly, these amendments will minimize the regulatory burden for designated trade repositories, as the data elements that they collect and the other requirements that apply to them will more closely align with international standards.

The Proposed Trade Reporting Amendments to harmonize data fields include:

• Amendments in respect of the UTI

We have proposed amendments to implement the UTI Technical Guidance published by the CPMI-IOSCO Working Group. These amendments set out a new hierarchy to determine which entity is responsible for generating the UTI for a transaction. The hierarchy is intended to align globally while also generally aligning with the reporting counterparty hierarchy under subsection 25(1).

• Amendments in respect of the UPI

We have proposed amendments to implement the UPI Technical Guidance published by the CPMI-IOSCO Working Group. These amendments require a reporting counterparty to identify a transaction through the means of a UPI assigned by the Derivatives Service Bureau.³

• Updates to Appendix A of the Trade Reporting Rule

We have updated Appendix A [Minimum data fields required to be reported to a designated trade repository] of the Trade Reporting Rule to reflect global standards set out in the CDE Technical Guidance, including harmonizing the “Data Element Descriptions” column with globally standard descriptions. We have streamlined and removed a number of data elements to align with the CDE Technical Guidance and other global regulators. For example, by eliminating the “Other details” data element in the current Trade Reporting Rule, which requires market participants to “provide any additional information that may be necessary” we will eliminate thousands of details that market participants are reporting under this data element given the uncertainty as to what is required under this data element.

• New OSC Derivatives Data Technical Manual

A new OSC Derivatives Data Technical Manual is being created to inform market participants on how to consistently report in accordance with the Trade Reporting Rule, which includes guidance on administrative matters such as the format and values for reporting in line with global data standards, together with examples. This approach aligns with the approach taken by the U.S. Commodity Futures Trading Commission (CFTC) and would permit flexibility for future updates to administrative technical guidance to maintain harmonization with global changes in reporting formats and values while maintaining the basic data elements in Appendix A to the Trade Reporting Rule. A draft of the OSC Derivatives Data Technical Manual has been published in a Staff Notice available on the OSC’s website.

In addition to the changes to harmonize data reporting with international standards, other notable changes to the Trade Reporting Rule in the Proposed Trade Reporting Amendments include:

• Amendments to the interpretation of “affiliated entity”

In response to comments we received from stakeholders to further harmonize this concept with other CSA jurisdictions,⁴ the proposed amendments to the concept of “affiliated entity” align with that concept under proposed National Instrument 93-101 Derivatives: Business Conduct,⁵ which will result in increased harmonization under OTC derivatives related rules and across the trade reporting rules applicable in other Canadian jurisdictions.⁶  As a result of this change, limited partnerships and trusts will be able to benefit from the inter-affiliate transaction exclusion for non-dealers under section 41.1 [Affiliated entities] of the Trade Reporting Rule. In addition, a limited partnership or trust that is substantially guaranteed by an Ontario local counterparty will now also be a local counterparty under the Rule.

• Amendments to the definition of “derivatives dealer”

The current definition of “derivatives dealer” incorporates a “business trigger” test, based on whether the person or company is engaging in or holding themselves out as engaging in the business of trading in derivatives in Ontario as principal or agent. For clarity, we are updating the definition to include any other person or company required to be registered as a derivatives dealer under securities legislation. This aligns with the definition of “derivatives dealer” in the Proposed Business Conduct Instrument and is included in the event that the Proposed Registration Instrument may designate or prescribe additional entities to be derivatives dealers based on specified activities. However, it is important to note that the “business trigger” test would continue to apply regardless of whether a derivatives dealer is registered or exempted from the requirement to be registered in Ontario. We have updated the Trade Reporting CP to include guidance regarding the “business trigger”, which aligns with the Companion Policy in the Proposed Business Conduct Instrument.

• Obligations of designated trade repositories

We have updated trade repository governance, risk and operational requirements to better align with international Principles for Financial Market Infrastructures standards⁷ and to address comments that arose in connection with a CPMI-IOSCO assessment that addressed the implementation of these standards.⁸ In particular, we propose a new section 14.1 [Operational efficiency and effectiveness] to clarify the responsibilities of a designated trade repository to ensure efficient and effective service to the market participants it serves. This would include having mechanisms in place to review on a regular basis its service levels, pricing structure, costs and operational reliability.

We also propose a new section 24.1 [Linked and tiered participation arrangements] setting out that a designated trade repository must maintain controls and procedures to manage risk arising from link arrangements, such as networks that link various entities. When applicable, a designated trade repository is also expected to adequately oversee and mitigate risks associated with tiered participation arrangements, such as indirect participants.

• Prohibition on disclosure of counterparty identity by a designated trade repository

We propose a new section 22.1 [Transactions executed anonymously on a derivatives trading facility] to align with CFTC requirements⁹ and ensure that the identity of a counterparty to an anonymous transaction executed on a derivatives trading facility is not disclosed to users of the designated trade repository post-execution. Only a transaction in respect of which a counterparty does not know the identity of its counterparty prior to or at the time of execution of the transaction is protected under the proposed section 22.1.

• Validation of data

Validation is a new concept that is designed to ensure that the required data elements set out in Appendix A of the Trade Reporting Rule have been reported, and that the reported data follows standardized formats and values set out in the OSC Derivatives Data Technical Manual.

Amendments to subsection 22.2(1) require a designated trade repository to validate that the derivatives data received from a reporting counterparty satisfies the data elements in Appendix A of the Trade Reporting Rule and the standardized formats and values set out in the OSC Derivatives Data Technical Manual.¹⁰ A designated trade repository must notify a reporting counterparty whether or not the derivatives data that it has reported has satisfied the designated trade repository’s validation procedures. This will result in the designated trade repository rejecting derivatives data that has not satisfied its validation procedures.

Under subsection 26(6), the reporting counterparty to a transaction has not fulfilled its reporting obligations unless and until all relevant derivatives data reported satisfies the validation procedures of the designated trade repository.

Subject to certain exceptions, a designated trade repository must create and maintain records of all the derivatives data reported that failed to satisfy its validation procedures.

By ensuring that required derivatives data is reported in a consistent manner, we hope to promote more prompt and efficient reporting and superior data quality.¹¹

• Verification of data accuracy

Currently, a designated trade repository is required to confirm data accuracy with reporting counterparties. We have replaced this requirement with two distinct requirements that are intended to more effectively promote data accuracy. ¹²

First, under paragraph 26.1(1)(a), all reporting counterparties must ensure that all reported derivatives data is accurate and contains no misrepresentation. To facilitate this requirement, section 38 [Data available to counterparties]provides that a designated trade repository must provide counterparties to a transaction with timely access to all derivatives data relevant to that transaction which is submitted to the designated trade repository

Second, under paragraph 26.1(1)(b), reporting counterparties that are derivatives dealers and recognized or exempt clearing agencies are also required to verify the accuracy of data every 30 days. Section 23 [Verification of data accuracy] requires a designated trade repository to establish, maintain and enforce written policies and procedures to enable reporting counterparties that are derivatives dealers or recognized or exempt clearing agencies to meet these obligations.

• Maintenance and renewal of legal entity identifiers

Currently, the Trade Reporting Rule requires a local counterparty under section 28.1 [Maintenance and renewal of legal entity identifiers] to obtain, maintain and renew a legal entity identifier. We are proposing to extend this requirement to also apply to reporting counterparties that are not local counterparties. The extension of this requirement (which will primarily impact foreign derivatives dealers and regulated or exempt clearing agencies) will improve the accuracy of derivatives data by ensuring that the information associated with LEIs remains updated and relevant.

• Position level data

We hope to reduce regulatory burden by permitting the reporting of aggregate position level data under new section 32.1 [Position level data], as an optional alternative in certain circumstances to reporting lifecycle events. This will enable some market participants to report a netted aggregate of multiple transactions, instead of reporting lifecycle events separately for each transaction, provided the transactions meet certain criteria, including that they have no expiration date, involve identical contract specifications, and are replaceable with each other.

• Termination of an original transaction by a clearing agency

We propose a new subsection 32(3) which requires a recognized or exempt clearing agency to report the termination of an original transaction for a cleared transaction, consistent with CFTC requirements. ¹³

• Reporting of collateral and margin data

While the Trade Reporting Rule currently requires reporting counterparties to indicate whether a transaction is collateralized, we propose amendments to subsection 33(1) to require that a reporting counterparty that is a derivatives dealer or a recognized or exempt clearing agency must report collateral and margin data each business day until the transaction is terminated or expires. Accordingly, we have introduced new data elements relating to collateral and margin data in Appendix A to the Trade Reporting Rule that reflect new global standards set out in the CDE Technical Guidance published by the CPMI-IOSCO Working Group. This additional data will support the Commission’s systemic risk analysis.

• Derivatives trading facility

We propose a new section 36.1 [Derivatives trading facility] setting out that where a transaction involving a local counterparty is executed anonymously on a derivatives trading facility and is intended to be cleared, the derivatives trading facility has the obligations of a reporting counterparty, and the reporting hierarchy in section 25 [Reporting counterparty] does not apply.¹⁴

It is not feasible for reporting counterparties to report these transactions as currently required under the Rule. For example, in an anonymous transaction between Party A and Party B:

• If Party A is a local counterparty, it will know that the transaction is required to be reported under the Rule. However, without knowing the identity of Party B, Party A will be unable to determine which counterparty has the reporting obligation. If Party A were to report the transaction, it would be unable to report the legal entity identifier of Party B or the jurisdictions where Party B is a local counterparty, if applicable, as required under the Rule.
• If Party B is not a local counterparty, the transaction is not be required to be reported under the Rule unless Party A is a local counterparty, which Party B is not able to determine. This situation arises where, for example, Party B is a foreign derivatives dealer.

In these circumstances, we believe that the derivatives trading facility is best positioned to report the transaction, given that it is able to ascertain the identity of both counterparties. We believe there is no other alternative that results in accurate and complete data in connection with these transactions.

It is important that an original transaction in these circumstances be reported because, among other reasons, data in respect of an original transaction is publicly disseminated, while data in respect of the resulting novated transactions with the clearing agency is not. Transparency is one of the fundamental policy objectives of the Rule and promotes confidence in Ontario’s derivatives market.

While this represents a new obligation on derivatives trading facilities, we considered the following factors that may mitigate the impact of this change:

• at this time, we are only aware of swap execution facilities that permit such anonymous transactions, and these entities already have reporting obligations in these circumstances under CFTC requirements;¹⁵
• the three CFTC registered swap data repositories are the same entities as the designated trade repositories in Ontario, and as a result, swap execution facilities should be able to continue reporting to the same repository under the Trade Reporting Rule;
• the data elements under the Trade Reporting Rule generally align with CFTC requirements, with some exceptions;
• because these original transactions are typically novated immediately to the clearing agency, there should be no ongoing reporting of valuation and collateral and margin data, and as discussed above, the recognized or exempt clearing agency will report the termination of the original transaction consistent with CFTC requirements.

We continue to require reporting counterparties to report transactions on a derivatives trading facility that are not anonymously executed.

• Burden reduction for non-dealers

We propose several amendments that reduce regulatory burden for non-dealers:

• Reporting hierarchy: We propose amendments to the reporting hierarchy in subsection 25(1)(e) to enable two non-dealers to agree through any written agreement which counterparty is required to report under the Trade Reporting Rule. This change will enable greater flexibility in respect of the reporting requirement.
• Verification: As noted above, the data verification requirements under subsection 26.1(1) will not apply to non-dealers. While reporting counterparties that are not derivatives dealers must ensure the accuracy of the data that they report, they will not have to verify the accuracy of that data every 30 days.
• Valuation, collateral and margin data: We propose amendments to section 33 [Valuation data and collateral and margin data] such that the requirement to report valuation, collateral and margin data only applies to derivatives dealers and recognized or exempt clearing agencies. This is a change from the current requirement where non-dealers must report valuation data quarterly.
• Commodity exclusion: We propose amendments to section 40 [Commodity transactions] such that a non-dealer local counterparty with an aggregate month-end gross notional outstanding less than $250 000 000 in respect of physical commodity transactions is not required to report derivatives data in respect of physical commodity transactions. This is an increase in exemptive relief from $500,000. This increase is necessary to achieve harmonization with the other CSA jurisdictions. In the Ontario market, it represents a relatively immaterial number of transactions and will reduce burden on these market participants.
• Inter-affiliate exclusion: As noted above, as a result of the broader concept of “affiliated entity” that we propose to harmonize with other CSA jurisdictions, limited partnerships and trusts will be able to benefit from the inter-affiliate transaction exclusion for non-dealers under section 41.1 [Affiliated entities] of the Trade Reporting Rule.

• Individuals will be a local counterparty

Individuals are currently not local counterparties under the Trade Reporting Rule. Transactions with individuals are nevertheless required to be reported where the other counterparty to the transaction is a local counterparty (for example, an Ontario derivatives dealer transacting with an individual). Where a transaction is between an individual located in Ontario and a foreign derivatives dealer, the transaction is not currently required to be reported as it does not involve a local counterparty. This results in inconsistent data regarding transactions with individuals, which are becoming increasingly relevant in connection with the Commission’s oversight of the derivatives market.

As a result, we propose to add individuals who are residents of Ontario to the definition of “local counterparty”. Consequently, for example, a transaction between an individual who is a resident of Ontario and a foreign derivatives dealer will now be required to be reported by the foreign derivatives dealer.

We anticipate minimal additional regulatory burden in connection with this requirement, as derivatives dealers should know the location of their counterparties who are individuals without the need for additional outreach. We also note that data relating to individuals continues to be anonymized because individuals are not required to obtain a legal entity identifier under the Trade Reporting Rule.

We have added a new exclusion under section 41.2 [Individuals] to exclude individuals from the requirement to report transactions under the Trade Reporting Rule.

In addition to the above noted changes, the Proposed Trade Reporting Amendments include the following changes that clarify the intended application of certain provisions of the Trade Reporting Rule as well as other house-keeping changes:

• Amendments to Appendix B of the Trade Reporting Rule

We have updated Appendix B [Equivalent trade reporting laws of foreign jurisdictions subject to deemed compliance pursuant to subsection 26(5)] of the Trade Reporting Rule to reflect current equivalent derivatives trade reporting laws of the European Union and to add equivalent derivatives trade reporting laws of the United Kingdom. However, we remind market participants that the substituted compliance under subsection 26(5) is limited and subject to certain conditions.

• Amendments to Appendix C of the Trade Reporting Rule

Designated trade repositories require certain periods of downtime to perform testing, maintenance and upgrades, and may therefore not be able to publicly disseminate certain information 48 hours after the time and date represented by the execution timestamp field of a transaction as required under Appendix C [Requirements for the public dissemination of transaction level data]. As a result, proposed amendments permit designated trade repositories to publicly disseminate certain information as soon as technologically practicable following the conclusion of a period of routine or ad hoc downtime that is required for such reasons.

• Correction of data available to regulators and correction of data available to the public

We have clarified in paragraph 37(1)(e) that data provided to the Commission by a designated trade repository must be corrected following a correction to an error or omission in reported derivatives data. Similarly, we have clarified in paragraphs 39(1)(b) and 39(3)(b) that aggregate data and transaction level reports made available to the public by a designated trade repository must be corrected following a correction to an error or omission in reported derivatives data.

• Redraft of the Trade Reporting CP

We have redrafted the Trade Reporting CP to provide clearer guidance to market participants subject to the Trade Reporting Rule. Notably, the Trade Reporting CP includes guidance regarding the definition of “derivatives dealer” that is aligned with the proposed Companion Policy to the Proposed Business Conduct Instrument, in addition to clearer guidance regarding the reporting hierarchy under subsection 25(1) of the Trade Reporting Rule.

Reporting counterparty for transactions between derivatives dealers

 

Current approach in Ontario

Since reporting under the Trade Reporting Rule commenced in 2014, the reporting hierarchy in subsection 25(1) has provided for static reporting logic that applies consistently with respect to transactions between derivatives dealers. If both derivatives dealers are party to the ISDA Multilateral Agreement, the ISDA methodology provides a consistent logic to determine the reporting counterparty under the Trade Reporting Rule.¹⁶ Otherwise, both derivatives dealers have the reporting requirement, and while they may delegate reporting, they each retain the reporting requirement.

Approach in other CSA Jurisdictions

The approach in Ontario differs from all other CSA jurisdictions, which enable derivatives dealers transacting with each other to agree through any written agreement which of them is required to report under the Trade Reporting Rule. Under this variable approach, the determination as to which derivatives dealer is the reporting counterparty may differ for each relationship, or even for different asset classes or transactions.

We recognize that a variable approach would afford greater flexibility and alleviate potential concerns with delegated reporting that a delegating party retains ultimate responsibility for reporting should the delegated party not perform as agreed. Notwithstanding these benefits to the variable approach in the other jurisdictions, there were compelling policy concerns in the Ontario derivatives market that led us to not adopt this approach in relation to transactions between dealers:

• We understand that many large derivatives dealers have designed their reporting systems to use static reporting logic, such that the same automated logic applies consistently to all their dealer counterparties. We are concerned that the alternative may involve accommodating separate agreements between different dealers, which may add potentially significant technological, operational and regulatory burden to these dealers and increase the risk of reporting errors and omissions. This in turn risks impairing the quality of the data that the Commission and the public receive. This is particularly important given the context of the large volume of, and potential systemic risk associated with, these transactions in Ontario.
• Under the current framework, the Commission is able to readily and independently ascertain which party is the reporting counterparty for a given transaction between derivatives dealers. This promotes efficient oversight given the large volume of transactions in Ontario. Under a variable approach, we could not ascertain which counterparty is responsible for fulfilling our regulatory requirement until we obtain and review separate agreements between derivatives dealers.
• Under a variable approach, it is possible that certain derivatives dealers may refuse to trade with other derivatives dealers unless their counterparty agrees to do the reporting, which may impose an undue burden on certain derivatives dealers relative to their competitors. A person or company that is not a reporting counterparty under the Trade Reporting Rule would not be required to pay a derivatives participation fee under proposed amendments to OSC Rule 13-502 Fees and would also avoid the technological, operational and regulatory costs associated with trade reporting.

Also, while we appreciate potential concerns regarding the residual reporting responsibility under delegated reporting, we believe that it is reasonable to expect both large and small derivatives dealers, who are in the business of trading derivatives, to have procedures or contractual arrangements in place to ensure that reporting occurs, and we note that derivatives dealers are required to have these arrangements in place if they transact with non-dealers. We believe that delegated reporting remains a reasonable means among dealers of achieving the practical outcome of single reporting.

For these reasons, we have retained the current static approach in the Proposed Trade Reporting Amendments for transactions between derivatives dealers.

Alternative reporting hierarchy

The Commission has developed a potential alternative to the current approach in relation to transactions between derivatives dealers, with a view to providing for increased flexibility and reducing the need for delegated reporting. The alternative hierarchy is set out in Annex E. A blackline comparing the hierarchy in the Proposed Trade Reporting Amendments with the alternative hierarchy is set out in Annex F.

The alternative hierarchy recognizes that derivatives dealers that are financial entities may generally be better positioned to report transactions than derivatives dealers that are not financial entities. For example, a commodity dealer or money services business transacting with a bank may currently delegate its reporting obligation to the bank. Under the alternative hierarchy, the bank would be the reporting counterparty in this situation, which avoids the need for delegation. We note that certain other jurisdictions both within and outside Canada also prioritize financial entities in their respective reporting hierarchies.

While the alternative hierarchy maintains a static approach in relation to transactions involving derivatives dealers that are financial entities, which comprise the majority of transactions and most significant potential systemic risk in Ontario, the alternative hierarchy provides greater flexibility in relation to transactions between two derivatives dealers that are both non-financial entities. In this regard, in a transaction between two derivatives dealers that are not financial entities (for example, two commodity dealers), the alternative hierarchy enables them to agree through any written agreement which counterparty bears the reporting requirement under the Trade Reporting Rule. We wish to highlight, however, that all derivatives dealers, including derivatives dealers that are not financial entities, would continue to be required to report when transacting with a non-dealer.

The definition of “financial entity” in the alternative hierarchy has been developed to reflect a broad range of financial entities in the context of the derivatives market. It is important to note that the definition as it relates to the alternative hierarchy is only relevant to derivatives dealers that are also financial entities. For example, the reporting requirement in relation to an investment fund that meets the definition of “financial entity” but is not a derivatives dealer would continue to be addressed under paragraphs 25(1)(e) to (g) of the alternative hierarchy.

While it is important to consider the benefits to the alternative hierarchy, we note that there may also be potential disadvantages that market participants should consider, such as increasing complexity to the reporting hierarchy, outreach to counterparties that may be required to determine the status of counterparties, and possible technological and operational changes for derivatives dealers.

We will consider comments from market participants in determining whether to adopt the hierarchy in the Proposed Trade Reporting Amendments (as set out in Annexes A and B) or whether to replace this with the alternative hierarchy (as set out in Annex E) when we publish the final amendments to the Trade Reporting Rule. We encourage market participants to explain their preference and provide detailed comments regarding the advantages and disadvantages of each hierarchy.

Benchmark Reference Rates

We are monitoring changes to benchmark reference rates, including recent updates relating to CDOR, USD LIBOR, EURIBOR and GBP LIBOR, which will affect indices that we require to be publicly disseminated. We will continue to monitor these developments as they affect trading liquidity, and we will assess whether other products are suitable for public dissemination at a later date.

Transition Period/Differences in Data Elements with CFTC 

We understand that the CFTC will be harmonizing with the global trade reporting standards set out by the CPMI-IOSCO Working Group in two phrases, with the first set of amendments to take effect in or about December 2022 and the second set of amendments to take effect in or about December 2023 (the CFTC Amendments). We are aiming to finalize the Proposed Trade Reporting Amendments and implement them in 2024 after the CFTC Amendments. Accordingly, there will be a period of time where reporting counterparties will be subject to the new global standards in some jurisdictions but not subject to them in Ontario. We are developing guidance to assist market participants during this transition period.

Summary of Proposed Product Determination Changes

The Proposed Product Determination Changes clarify the current interpretation that, similar to other financial commodities that do not come within the exclusion in paragraph 2(1)(d) of the Product Determination Rule, certain crypto assets that are also “financial commodities” do not fall under the exclusion in paragraph 2(1)(d) of the Product Determination Rule. Accordingly, derivatives linked to these crypto assets are required to be reported under the Trade Reporting Rule. We have proposed the same clarification in the Trade Reporting CP regarding the commodity exclusion under section 40 [Commodity transactions].

Alternatives Considered

We did not consider alternatives to the Proposed Trade Reporting Amendments. Given the global nature of derivatives markets, it is critical that the Trade Reporting Rule aligns with global standards. Accordingly, the Proposed Trade Reporting Amendments are necessary to harmonize the Trade Reporting Rule, which will provide for more efficient and consistent derivatives data reporting and lead to a reduction of regulatory burden for most market participants.

Unpublished Materials

In developing the Proposed Trade Reporting Amendments, we have not relied on any significant unpublished study, report or other written materials.

Legislative Authority for Rulemaking

Section 21.2.2 and paragraphs 12 and 35 of subsection 143(1) of the Securities Act (Ontario) provide the authority for making the Proposed Trade Reporting Amendments.

List of Annexes

This notice contains the following annexes:

Annex A	Proposed amendments to the Trade Reporting Rule
Annex B	Blackline of proposed amendments to the Trade Reporting Rule
Annex C	Proposed changes to the Trade Reporting CP
Annex D	Blackline of proposed changes to the Trade Reporting CP
Annex E	Alternative reporting hierarchy (Trade Reporting Rule)
Annex F	Blackline of alternative reporting hierarchy (Trade Reporting Rule)
Annex G	Proposed changes to the Product Determination CP
Annex H	Blackline of proposed changes to the Product Determination C
Annex I	Regulatory impact assessment (Trade Reporting Rule)

 

Request for Comments

 

In addition to your comments on all aspects of the Proposed Trade Reporting Amendments, the Commission also seeks specific feedback on the following questions:

1) Harmonization with global standards

We have updated the required data fields for reporting market participants as set out in Appendix A of the Trade Reporting Rule with the goal of harmonizing with global standards and accordingly, reducing regulatory burden. As well, we created a new OSC Derivatives Data Technical Manual to inform reporting market participants on administrative matters for reporting in accordance with the Trade Reporting Rule.

Please provide your comments on whether you anticipate that the changes to the data field requirements and the corresponding OSC Derivatives Data Technical Manual will reduce regulatory burden and increase efficiency and clarity when meeting trade reporting requirements.

2) Reporting hierarchy

We have developed a potential alternative to the reporting hierarchy, which we have set out in Annex E to the Notice. This alternative hierarchy is an effort by us to provide increased flexibility and reduce the need for delegated reporting where feasible. The alternative hierarchy still maintains a static approach in relation to transactions involving derivatives dealers that are financial entities but provides greater flexibility in relation to transactions between two derivatives dealers that are both non-financial entities. The increase in flexibility may, however, result in increased complexity to the reporting hierarchy as well as possible technological and operational changes for derivatives dealers.

Do you support adopting the hierarchy in the Proposed Trade Reporting Amendments (as set out in Annexes A and B) or the alternative hierarchy as set out in Annex E? 

3) Data accuracy

We have proposed replacing the current concept of confirmation of data accuracy with a requirement under paragraph 26.1(1)(a) for all reporting counterparties to ensure that all reported derivatives data is accurate and contains no misrepresentation and a requirement under paragraph 26.1(1)(b) for reporting counterparties that are derivatives dealers and recognized or exempt clearing agencies to verify the accuracy of data every 30 days. A designated trade repository must establish written policies and procedures to enable the reporting counterparty to carry out its verification obligations under paragraph 26.1(1)(b); however, while a designated trade repository must provide counterparties to a transaction with access to derivatives data, we have not contemplated a specific requirement for policies and procedures designed to enable the requirement under paragraph 26.1(1)(a).

Is it necessary for a trade repository to implement policies and procedures to enable all reporting counterparties to ensure that all reported derivatives data is accurate and contains no misrepresentation, or is providing access to such counterparties sufficient to enable them to fulfill this requirement?

4) Maintenance and renewal of LEIs

The Trade Reporting Rule requires a local counterparty under section 28.1 [Maintenance and renewal of legal entity identifiers] to maintain and renew its LEI. However, we have identified instances where non-reporting local counterparties are not maintaining and renewing their LEIs, as required. As a result, the LEIs lapse and the information associated with them is no longer current. This reduces the benefits associated with LEIs. While we do not currently expect reporting counterparties to verify the maintenance and renewal of LEIs of their counterparties, we are interested to receive comments from market participants regarding any potential steps that could be taken to improve the maintenance and renewal of LEIs of non-reporting counterparties.

Please provide your comments in writing by October 7, 2022.

Please address your comments to the Ontario Securities Commission, and send your comments to the following address:

The Secretary
Ontario Securities Commission
20 Queen Street West
22nd Floor
Toronto, Ontario M5H 3S8
Fax : 416-593-2318
[email protected]

We cannot keep submissions confidential because applicable legislation requires publication of the written comments received during the comment period. All comments received will be posted on the website of the OSC at www.osc.gov.on.ca. Therefore, you should not include personal information directly in comments to be published. It is important that you state on whose behalf you are making the submission.

Questions

Please refer your questions to either:

Kevin Fine
Director, Derivatives Branch
Ontario Securities Commission
416-593-8109
[email protected]  
 

Greg Toczylowski
Manager, Derivatives Branch
Ontario Securities Commission
416-593-8215
[email protected]   

Footnotes