9 - Derivatives

Multilateral CSA Notice of Publication Amendments to National Instrument 94-102 Derivatives: Customer Clearing and Protection of Customer Collateral and Positions

May 12, 2022 Introduction The Canadian Securities Administrators (the CSA or we), except the Ontario Securities Commission (OSC), are adopting amendments to National Instrument 94-102 Derivatives: Customer Clearing and Protection of Customer Collateral and Positions (NI 94-102) (the Amendments).

The Amendments reduce the frequency of the requirement that regulated clearing agencies deliver Form 94-102F3. Specific information about the Amendments is described in the “Substance and Purpose” section below.

Provided all necessary government ministerial approvals are obtained, the Amendments will come into force on July 19, 2022.

This Notice, including its annexes, is available on the websites of the CSA jurisdictions, including:

www.albertasecurities.com www.bcsc.bc.ca www.fcaa.gov.sk.ca www.fcnb.ca www.lautorite.qc.ca www.mbsecurities.ca nssc.novascotia.ca

Background On May 20, 2021, in order to facilitate the rule-making process for the Amendments, the CSA published Notice 94-304 - Frequency of the requirement to deliver Form 94-102F3 Customer Collateral Report: Regulated Clearing Agency (Notice 94-304) announcing that all jurisdictions, except the OSC, were making/issuing, as applicable in the local jurisdiction, parallel orders of general application (the Orders) reducing the frequency of the requirement for regulated clearing

-2-

agencies 1 to deliver Form 94-102F3 Customer Collateral Report: Regulated Clearing Agency (Form 94-102F3). The Orders came into effect on August 1, 2021. 2 The OSC made amendments to NI 94-102, which have the same substantive effect as the Orders. These amendments came into force on August 1, 2021 3 .

The CSA, except the OSC, published for comment on September 16, 2021 proposed amendments to NI 94-102 to reduce the frequency of the requirement to deliver Form 94-102F3.

Substance and Purpose The Amendments were developed by the CSA as a way to reduce regulatory burden without compromising investor protection or adversely impacting systemic risk.

The CSA recognize that, in addition to the obligation of a regulated clearing agency to file Form 94-102F3, clearing intermediaries that receive customer collateral are also required to deliver information to the securities regulatory authority in either Form 94-102F1 Customer Collateral Report: Direct Intermediary (Form 94-102F1) or Form 94-102F2 Customer Collateral Report: Indirect Intermediary (Form 94-102F2), as applicable, each of which presents a snapshot of the value of collateral held or posted by each reporting clearing intermediary. The CSA note, however, that Form 94-102F3 provides a snapshot of the value of customer collateral received by the regulated clearing agency from each clearing intermediary and the location where the regulated clearing agency holds this customer collateral and its value. This information is not otherwise available to the CSA.

Hence, while Form 94-102F1 and Form 94-102F2 provide us with data relating to customer collateral held or posted by clearing intermediaries, Form 94-102F3 provides additional data relating to collateral posted by clearing intermediaries. This additional data allows for the reconciliation of data received from clearing intermediaries.

Reducing the frequency of the requirement to deliver Form 94-102F3 from monthly to quarterly generates time and cost savings for regulated clearing agencies, without compromising the CSA’s ability to detect major changes in the derivatives clearing market and to ensure the proper identification of customer collateral and the clearing intermediaries, regulated clearing agencies and permitted depositories that hold it.

Summary of the Amendments Except in Ontario and subject to the Orders, section 43 of NI 94-102 currently requires a regulated clearing agency that receives customer collateral to electronically deliver a completed Form 94-

1 A regulated clearing agency is defined in NI 94-102 as “(a) in British Columbia, Manitoba and Ontario, a person or company recognized or exempt from recognition as a clearing agency in the local jurisdiction, and (b) in Alberta, Newfoundland and Labrador, New Brunswick, the Northwest Territories, Nova Scotia, Nunavut, Prince Edward Island, Québec, Saskatchewan and Yukon, a person or company recognized or exempt from recognition as a clearing agency or clearing house pursuant to the securities legislation of any jurisdiction of Canada”. 2 Blanket Order 94-502, available on the website of the securities regulatory authority in the local jurisdiction. 3 See, in Ontario, Amendment to National Instrument 94-102 Derivatives: Customer Clearing and Protection of Customer

Collateral and Positions, published May 20, 2021. The amendments, which do not include any new requirements, were made by the OSC on an expedited basis, and without prior publication for comment, as permitted under paragraph 143.2(5)(b) of the Securities Act (Ontario).

-3-

102F3 to the relevant regulator or securities regulatory authority, within 10 business days of the end of each calendar month.

To accord with the Orders, the CSA, except the OSC, is amending NI 94-102 to reduce the frequency of the requirement to deliver Form 94-102F3 from monthly to quarterly. As a result of the Amendments, NI 94-102 will require a regulated clearing agency to electronically deliver a completed Form 94-102F3 within 10 business days of the end of each calendar quarter, and the Orders will expire on the date of coming into force of the Amendments.

Summary of Comments Received by the CSA During the consultation period, we did not receive any comments. Contents of Annexes The following annexes form part of this Notice: • Annex A –Amendments to National Instrument 94-102 Derivatives: Customer Clearing and Protection of Customer Collateral and Positions • Annex B - Blackline of National Instrument 94-102 Derivatives: Customer Clearing and Protection of Customer Collateral and Positions showing the Amendments

Questions If you have questions about this Notice or the Amendments, please contact any of the following: Dominique Martin Co-Chair, CSA Derivatives Committee Director, Oversight of Trading Activities Autorité des marchés financiers 514-395-0337, ext. 4351 dominique.martin@lautorite.qc.ca

Janice Cherniak Senior Legal Counsel Alberta Securities Commission 403-355-4864 janice.cherniak@asc.ca

Michael Brady Deputy Director, CMR British Columbia Securities Commission 604-899-6561 mbrady@bcsc.bc.ca

Paula White Deputy Director, Compliance and Oversight Manitoba Securities Commission 204-945-5195 paula.white@gov.mb.ca

Abel Lazarus Director, Corporate Finance Nova Scotia Securities Commission 902-424-6859 abel.lazarus@novascotia.ca

-4-

David Shore Legal Counsel, Securities Financial and Consumer Services Commission (New Brunswick) 506-658-3038 david.shore@fcnb.ca

Sonne Udemgba Director, Legal, Securities Division Financial and Consumer Affairs Authority of Saskachewan 306-787-5879 sonne.udemgba@gov.sk.ca

ANNEX A

THE MANITOBA SECURITIES COMMISSION MSC RULE 2022-6 (SECTION 149.1, THE SECURITIES ACT)

AMENDMENTS TO NATIONAL INSTRUMENT 94-102 DERIVATIVES: CUSTOMER CLEARING AND PROTECTION OF CUSTOMER COLLATERAL AND POSITIONS

1. National Instrument 94-102 Derivatives: Customer Clearing and Protection of Customer Collateral and Positions is amended by this Instrument.

2. Section 43 is replaced with the following: Customer collateral report – regulatory 43. A regulated clearing agency that receives customer collateral must electronically deliver to the regulator or securities regulatory authority, within 10 business days of the end of each calendar quarter, a completed Form 94-102F3 Customer Collateral Report: Regulated Clearing Agency.

3. Form 94-102F3 Customer Collateral Report: Regulated Clearing Agency is amended by replacing footnote 3 with the following:

3 The Reporting Period is the calendar quarter for which the form is submitted. 4. This Instrument comes into force on July 19, 2022.

ANNEX B This Annex sets out a blackline showing the amendments to National Instrument 94-102 Derivatives: Customer Clearing and Protection of Customer Collateral and Positions, as set out in Annex A.

NATIONAL INSTRUMENT 94-102 DERIVATIVES: CUSTOMER CLEARING AND PROTECTION OF CUSTOMER COLLATERAL AND POSITIONS

PART 1 DEFINITIONS, INTERPRETATION AND APPLICATION

Definitions and interpretation 1. (1) In this Instrument “Canadian financial institution” has the meaning ascribed to it in National Instrument 45-106 Prospectus Exemptions;

“cleared derivative” means a derivative that is, directly or indirectly, submitted to and cleared by a clearing agency;

“clearing intermediary” means a direct intermediary or an indirect intermediary; “customer” means a counterparty to a cleared derivative other than a clearing intermediary or a regulated clearing agency;

“customer collateral” means all cash, securities and other property if any of the following apply:

(a)

(b)

the cash, securities or other property is received or held by a clearing intermediary or regulated clearing agency from, for or on behalf of a customer, and is intended to or does margin, guarantee, secure, settle or adjust a cleared derivative of the customer;

the cash, securities or other property is posted on behalf of a customer by a clearing intermediary to satisfy the margin requirements arising from the customer’s cleared derivatives;

“direct intermediary” means a person or company that (a) with respect to a cleared derivative, is a participant of the regulated clearing agency at which the cleared derivative is cleared,

(b)

(c)

-2-

directly provides clearing services for a customer in respect of a cleared derivative entered into by, for or on behalf of the customer, and

requires, receives or holds collateral from, for or on behalf of the customer in providing clearing services;

“excess margin” means customer collateral in respect of a customer’s cleared derivatives that

(a)

(b)

is delivered to a regulated clearing agency or clearing intermediary from, for or on behalf of the customer, and

has a value in excess of the amount required by the regulated clearing agency to clear and settle the cleared derivatives of the customer;

“indirect intermediary” means a person or company that (a) indirectly provides clearing services for a customer in respect of a cleared derivative entered into by, for or on behalf of the customer, and

(b)

requires, receives or holds collateral from, for or on behalf of the customer in providing clearing services;

“initial margin” means, in relation to a regulated clearing agency’s margin system that manages credit exposures to its participants, collateral that is required by the regulated clearing agency to cover potential changes in the value of a customer’s cleared derivatives over an appropriate close-out period in the event of a default;

“local customer” means a customer that, in respect of a local jurisdiction, is any of the following:

(a) (b)

an individual who is resident in the local jurisdiction; a person or company, other than an individual, to which any of the following apply: (i) the person or company is organized under the laws of the local jurisdiction; (ii) the head office of the person or company is in the local jurisdiction; (iii) the principal place of business of the person or company is in the local jurisdiction;

“participant” means a person or company that has entered into an agreement with a regulated clearing agency to access the services of the regulated clearing agency and is bound by the regulated clearing agency’s rules and procedures;

-3-

“permitted depository” means a person or company that is any of the following: (a) a Canadian financial institution or Schedule III bank; (b) a regulated clearing agency; (c) the central bank of Canada or of a permitted jurisdiction; (d) in Québec, a person recognized or exempt from recognition as a central securities depository under the Securities Act (Québec);

(e)

(f)

(g)

a person or company (i) whose head office or principal place of business is in a permitted jurisdiction,

(ii) (iii)

that is a banking institution or trust company of a permitted jurisdiction, and that has shareholders’ equity, as reported in its most recent audited financial statements, of not less than the equivalent of $100 000 000;

with respect to customer collateral that it receives from a customer or a clearing intermediary for which it provides clearing services, a registered investment dealer as defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations;

with respect to customer collateral that it receives from a customer or a clearing intermediary for which it provides clearing services, a prudentially regulated entity

(i)

(ii)

whose head office or principal place of business is located outside of Canada, and

that is subject to and in compliance with the laws of a permitted jurisdiction relating to clearing services and the requiring, receiving and holding of customer collateral;

“permitted investment” means cash or a security or other financial instrument with minimal market and credit risk that is capable of being liquidated rapidly with minimal adverse price effect;

“permitted jurisdiction” means a foreign jurisdiction that is any of the following: (a) a country where the head office or principal place of business of a Schedule III bank is located, and a political subdivision of that country;

(b)

-4-

if a customer has provided express written consent to the clearing intermediary or the regulated clearing agency clearing a cleared derivative in a foreign currency, the country of origin of the foreign currency used to denominate the rights and obligations under the cleared derivative entered into by, for or on behalf of the customer, and a political subdivision of that country;

“position” means the economic interest of a counterparty in an outstanding cleared derivative at a point in time;

“prudentially regulated entity” means a person or company that is subject to and in compliance with the laws of a foreign jurisdiction that is a permitted jurisdiction under paragraph (a) of the definition of “permitted jurisdiction”, relating to minimum capital requirements, financial soundness and risk management;

“qualifying central counterparty” means a person or company to which all of the following apply:

(a)

(b)

it is recognized, exempt from recognition or otherwise registered or authorized to operate as a central counterparty in a jurisdiction of Canada or a foreign jurisdiction by a government or regulatory authority;

it is subject to regulation that is consistent with the Principles for market infrastructures published by the Bank for International Settlements’ Committee on Payments and Market Infrastructures and the International Organization of Securities Commissions in April 2012, as amended from time to time;

“regulated clearing agency” means (a) in British Columbia, Manitoba and Ontario, a person or company recognized or exempt from recognition as a clearing agency in the local jurisdiction, and

(b)

in Alberta, Newfoundland and Labrador, New Brunswick, the Northwest Territories, Nova Scotia, Nunavut, Prince Edward Island, Québec, Saskatchewan and Yukon, a person or company recognized or exempt from recognition as a clearing agency or clearing house pursuant to the securities legislation of any jurisdiction of Canada;

“Schedule III bank” means an authorized foreign bank named in Schedule III of the Bank Act (Canada);

“segregate” means to separately hold or separately account for a customer’s positions or customer collateral.

(2)

In this Instrument, a person or company is an affiliated entity of another person or company if one of them controls the other or each of them is controlled by the same person or company.

(3)

(4)

-5-

In this Instrument, a person or company (the first party) is considered to control another person or company (the second party) if any of the following apply:

(a)

(b)

(c)

the first party beneficially owns or directly or indirectly exercises control or direction over securities of the second party carrying votes which, if exercised, would entitle the first party to elect a majority of the directors of the second party, unless the first party holds the voting securities only to secure an obligation;

the second party is a partnership, other than a limited partnership, and the first party holds more than 50% of the interests of the partnership;

the second party is a limited partnership and the general partner of the limited partnership is the first party;

(d) the second party is a trust and the trustee of the trust is the first party. In this Instrument, in Alberta, British Columbia, New Brunswick, Newfoundland and Labrador, the Northwest Territories, Nova Scotia, Nunavut, Prince Edward Island, Saskatchewan and Yukon, “derivative” means a “specified derivative” as defined in Multilateral Instrument 91-101 Derivatives: Product Determination.

Application 2. (1) This Instrument does not apply to any of the following: (a) a regulated clearing agency whose head office or principal place of business is in a foreign jurisdiction except with respect to a cleared derivative entered into by, for or on behalf of a local customer;

(2)

(b)

a clearing intermediary that provides clearing services except with respect to a cleared derivative entered into by, for or on behalf of a local customer.

This Instrument applies to (a) in Manitoba, (i) a derivative other than a contract or instrument that, for any purpose, is prescribed by any of sections 2, 4 and 5 of Manitoba Securities Commission Rule 91-506 Derivatives: Product Determination not to be a derivative, and

(ii)

a derivative that is otherwise a security and that, for any purpose, is prescribed by section 3 of Manitoba Securities Commission Rule 91-506 Derivatives: Product Determination not to be a security,

(b)

(c)

-6-

in Ontario, (i) a derivative other than a contract or instrument that, for any purpose, is prescribed by any of sections 2, 4 and 5 of Ontario Securities Commission Rule 91-506 Derivatives: Product Determination not to be a derivative, and

(ii)

a derivative that is otherwise a security and that, for any purpose, is prescribed by section 3 of Ontario Securities Commission Rule 91-506 Derivatives: Product Determination not to be a security, and

in Québec, a derivative specified in section 1.2 of Regulation 91-506 respecting derivatives determination, other than a contract or instrument specified in section 2 of that regulation.

In each other local jurisdiction, this Instrument applies to a derivative as defined in subsection 1(4) of this Instrument. This text box does not form part of this Instrument and has no official status.

(3) (4)

Despite subsection (2), this Instrument does not apply to an option on a security. In British Columbia, Newfoundland and Labrador, the Northwest Territories, Nunavut, Prince Edward Island and Yukon, subsection (3) does not apply to a security that is a derivative as defined in subsection 1(4).

PART 2 TREATMENT OF CUSTOMER COLLATERAL BY A CLEARING INTERMEDIARY

Segregation of customer collateral – clearing intermediary 3. (1) A clearing intermediary must segregate a customer’s positions and customer collateral from the positions and property of other persons or companies including the positions and property of the clearing intermediary.

(2)

A clearing intermediary must segregate the positions and customer collateral of a customer of an indirect intermediary from the positions and property of the indirect intermediary.

Holding of customer collateral – clearing intermediary 4. A clearing intermediary must hold all customer collateral (a) in one or more accounts at a permitted depository that are clearly identified as holding customer collateral, and

(b)

in separate accounts from the property of all persons who are not customers.

-7-

Excess margin – clearing intermediary 5. A clearing intermediary must at least once each business day identify and record the value of excess margin it holds that is attributable to each customer for which the clearing intermediary provides clearing services.

Use of customer collateral – clearing intermediary 6. (1) A clearing intermediary must not use or permit the use of customer collateral except in accordance with this section and sections 7 and 8.

(2)

(3)

A clearing intermediary must not use or permit the use of customer collateral of a customer except to do any of the following:

(a) (b)

margin, guarantee, secure, settle or adjust a cleared derivative of the customer; with respect to excess margin, guarantee, secure or extend the credit of the customer.

Other than with respect to excess margin used in accordance with paragraph (2)(b), a clearing intermediary must not create or permit to exist any lien or other encumbrance on a cleared derivative of a customer or customer collateral in respect of the cleared derivative unless the lien or other encumbrance secures an obligation resulting from the cleared derivative in favour of any of the following:

(a) (b)

the customer; the regulated clearing agency or clearing intermediary responsible for clearing the cleared derivative.

Investment of customer collateral – clearing intermediary 7. (1) A clearing intermediary must not invest customer collateral or enter into an agreement for resale or repurchase of customer collateral except in accordance with subsections (2) and (3).

(2)

A clearing intermediary may (a) invest customer collateral in a permitted investment, and (b) enter into an agreement for resale or repurchase of customer collateral if all of the following apply:

(i) (ii)

the agreement is for the resale or repurchase of a permitted investment; the agreement is in writing;

(3)

(iii)

(iv)

(v)

-8-

the term of the agreement is no more than one business day, or reversal of the transaction is possible on demand;

written confirmation specifying the terms of the agreement is delivered by the counterparty to the agreement to the clearing intermediary immediately on entering into the agreement;

the agreement is not entered into with an affiliated entity of the clearing intermediary.

A loss resulting from an investment or use of a customer’s customer collateral in accordance with subsection (1) or subsection (2) by the clearing intermediary must be borne by the clearing intermediary making the investment and not by the customer.

Use of customer collateral – indirect intermediary default 8. (1) A clearing intermediary must not use customer collateral of a customer of an indirect intermediary for which the clearing intermediary provides clearing services to satisfy an obligation of the indirect intermediary.

(2)

Despite subsection (1), a clearing intermediary may use the customer collateral of a customer to fully or partially satisfy an obligation of an indirect intermediary that arises or is accelerated as a consequence of the indirect intermediary’s default only if the obligation is attributable to a cleared derivative of the customer.

Acting as a clearing intermediary 9. (1) A person or company must not act as a clearing intermediary for a customer unless the person or company is any of the following:

(a)

(b)

(c)

a person or company that is subject to and is in compliance with the laws of a jurisdiction of Canada relating to minimum capital requirements, financial soundness and risk management;

a person or company that is registered as a dealer under securities legislation in a local jurisdiction;

a person or company that is (i) a prudentially regulated entity, and (ii) subject to and in compliance with the laws of a permitted jurisdiction relating to clearing services and the requiring, receiving and holding of customer collateral.

(2)

-9-

A clearing intermediary must not provide clearing services for a customer unless the clearing services are provided in respect of derivatives that are cleared by a regulated clearing agency.

Risk management – clearing intermediary 10. A clearing intermediary that provides or proposes to provide clearing services for an indirect intermediary must adopt and implement rules, policies or procedures reasonably designed to

(a)

identify, monitor and reasonably mitigate material risks arising from the provision of clearing services, and

(b) manage a default of the indirect intermediary. Risk management – indirect intermediary 11. (1) An indirect intermediary must establish and implement rules, policies or procedures reasonably designed to identify, monitor and reasonably mitigate the material risks to the clearing intermediary or its customers arising from the provision of indirect clearing services for a customer.

(2)

An indirect intermediary that receives clearing services from a clearing intermediary must provide the clearing intermediary with all information reasonably required to identify, monitor and reasonably mitigate any material risks arising from the provision of indirect clearing services for customers.

PART 3 RECORDKEEPING BY A CLEARING INTERMEDIARY

Retention of records – clearing intermediary 12. (1) A clearing intermediary must keep a record required under this Part and Part 4, and all supporting documentation,

(a) (b)

(c)

in a readily accessible and safe location and in a durable form, in the case of a record or supporting documentation that relates to a cleared derivative, for a period of 7 years following the date on which the cleared derivative expires or is terminated, and

in any other case, for a period of 7 years following the date on which a customer’s last cleared derivative that is cleared for or on behalf of the customer through the clearing intermediary expires or is terminated.

(2)

-10-

Despite subsection (1), in Manitoba, with respect to a customer or clearing intermediary located in Manitoba, the time period applicable to records and supporting documentation kept pursuant to subsection (1) is 8 years.