Canadian Securities Regulators Announces Temporary Exemptions For Derivatives Dealers and Advisers

On July 25, 2024, the Canadian Securities Administrators (CSA) introduced temporary exemptions from certain provisions of National Instrument 93-101 concerning Derivatives: Business Conduct (the "Business Conduct Rule”) in order to address feedback from derivatives dealers and advisers related to compliance with the Business Conduct Rule when it comes into force on September 28, 2024.¹

The relief is provided by way of local blanket order in Ontario entitled Coordinated Blanket Order 93-930 Re Temporary exemptions for derivatives firms from certain obligations when transacting with certain investment funds and for senior derivatives managers from certain reporting obligations (collectively, the "Blanket Order”), which becomes effective on September 28, 2024, and will expire on March 28, 2026 . This Blanket Order is harmonized across Alberta, Manitoba, New Brunswick, Newfoundland and Labrador, the Northwest Territories, Nova Scotia, Nunavut, Ontario, Prince Edward Island, Québec, Saskatchewan, and Yukon. The British Columbia Securities Commission is expected to issue a similar order, pending approval from B.C.'s Minister of Finance.

The temporary exemptions set out in the Blanket Order relate to: i) compliance with certain provisions of the Business Conduct Rule (other than Core Obligations, as defined therein) for derivatives parties that are investment funds managed in foreign jurisdictions; and ii) if certain conditions are met, extending the deadline for submitting the compliance report referred to in section 32(3)(a) of the Business Conduct Rule (the "Compliance Report” ) to the board of directors of a derivatives firm.

The proposed exemptions will:

(i) ensure that investment funds managed by an investment fund manager or advised by an adviser regulated in a foreign jurisdiction have the same treatment as an investment fund managed by an investment fund manager or advised by an adviser regulated in Canada; and

(ii) extend the deadline to the 2025 calendar year for a senior derivatives manager to submit a Compliance Report for the required part of 2024.

Background

The Business Conduct Rule was published on September 28, 2023, and will take effect on September 28, 2024. The Business Conduct Rule sets out a comprehensive regime for regulating the business conduct of dealers and advisers in the over-the-counter (OTC) derivatives market. For further details, see our October 10, 2023 Update, Canadian Securities Administrators Publish Final Business Conduct Rules for Derivatives Firms.

Submissions raised regarding the Business Conduct Rule included:

1. Uniform Application to Foreign Managed Investment Funds
   

   There were concerns about the uniform application of the Business Conduct Rule to investment funds recognized as ‘eligible derivatives parties’ (EDPs). Specifically, the Business Conduct Rule does not clearly classify as EDPs those investment funds managed or advised by foreign advisers or managers. Some derivatives firms were concerned this could lead to inconsistent application of the Business Conduct Rule to similar investment funds, as the Business Conduct Rule’s requirement may vary depending on whether a derivatives party is designated EDP or non-EDP.

2. Extension of Reporting Deadlines

   Derivative firms requested more time for senior derivatives managers to submit compliance reports, due to the short period between the Business Conduct Rule’s effective date and the end of 2024, combined with the operational challenges involved in meeting the current 2024 year-end deadline.

Exemptions to the Business Conduct Rule

In response to these in relation to the Business Conduct Rule, the Blanket Order sets out the following exemptions:

1. Exemption for a derivatives firm in respect of certain investment funds advised or managed by certain regulated foreign advisers

   
   To align with the exemption framework in section 8 of the Business Conduct Rule (which provides exemptions from certain requirements when dealing with or advising an EDP), a derivatives firm is exempt from certain Business Conduct Rule requirements (except core obligations in section 8(3)) when dealing with investment funds managed or advised by foreign advisers equivalent to an investment fund manager or adviser registered or authorized in Canada. This exemption aims to ensure equal treatment for both domestic and foreign-managed investment funds seeking EDP status.

2. Exemption for a senior derivatives manager from the requirement to submit compliance report by year-end 2024

   A senior derivatives manager is exempt from submitting Compliance Reports to the board of the derivatives dealers by the current year-end deadline, subject to meeting the following conditions: i) the derivatives firm is in compliance with all other applicable provisions of the Business Conduct Rule, and ii) the derivatives firm must include the period from September 28, 2024, the effective date of the Business Conduct Rule, to the end of 2024 in its 2025 Compliance Report.

The exemptions aim to offer regulatory flexibility while maintaining market integrity and compliance. The regulators have advised that they will continue to review and adjust the regulatory framework as needed based on continued feedback.

For further information on these exemptions, please contact any member of our Structured Finance and Derivatives Group.