SECURITIES REGULATORS LOOKING TO REGULATE RISKY DERIVITIVES MARKET
Friday, June 22, 2018 @ 9:21 AM | By Ian Burns
Published in The Lawyer’s Daily (www.thelawyersdaily.ca), part of LexisNexis Canada Inc.
The oversight body for Canada’s securities regulators has outlined a proposal to increase transparency in the risky derivatives market, a move that an observer says is long overdue.
The Canadian Securities Administrators (CSA) announced June 14 it was holding a consultation period on its proposed instrument to establish a business conduct regime for regulating dealers and advisers in over-the-counter (OTC) derivatives in Canada.
CSA chair Louis Morisset said the proposed rules are an “important milestone for Canada.”
“They will help protect against market abuse and together, the proposed business conduct instrument along with the proposed registration instrument will align us with international standards,” he said.
OTC derivatives are contracts that are traded and privately negotiated between two parties directly, rather than going through an exchange. The market is the largest for derivatives and is largely unregulated in terms of disclosure, and the inappropriate sale of derivatives was a major cause of the financial crisis of 2008.
The instrument sets out a comprehensive approach to regulating the conduct of dealers and advisers, including requirements relating to conflicts of interest, know-your-client party obligations, compliance and recordkeeping requirements, and reporting and senior management duties. It is designed to help protect investors, reduce risk, improve transparency, increase accountability and promote responsible business conduct in the market.
Fraser McDonald of Allen McDonald Swartz LLP said the CSA’s proposals are a step toward uniformity across Canada in dealing with derivatives “which can only be a good thing.”
“It’s better late than never,” he said. “The U.S. responded to the financial crisis quite fast with the Dodd-Frank Act, and this is a response about 10 years later in terms of securities regulators. [The market] has been largely unregulated, and where it has been regulated it has been sort of piecemeal, more so than other areas of securities regulation across Canada.”
McDonald noted there is not much transparency in either the products that are being traded or their price, as there is no market like the Toronto Stock Exchange (TSX) involved which has stringent transparency rules.
“[The instrument] recognizes inherent risks in derivatives trading,” he said. “It parallels the registration regime in securities, where there are different levels of regulation for ‘less sophisticated’ investors. Banks, other registrants [and] larger financial institutions are less regulated in terms of dealing with securities, so there’s quite a bit of regulation here in terms of what information has to be given to less sophisticated parties under this regime, which is a good thing.”
CSA members also plan to hold round tables related to the proposals. The CSA is asking all comments to be submitted in writing on or before Sept. 17.