An initiative that has its roots in the global financial crisis — stepping up oversight in the over-the-counter (OTC) derivatives markets — is still in the works, with the Canadian Securities Administrators’ (CSA’s) latest stab at a regulatory regime for dealers and advisers in the sector.
Following the 2008 financial crisis, regulators around the world pledged to beef up oversight in the OTC derivatives markets after the episode exposed the lack of rules and supervision in that corner of the market. This absence of oversight enabled “inappropriate” sales that “had a substantial impact on global financial markets and led to major losses for retail and institutional participants,” the CSA said in a notice spelling out its latest proposals.
The crisis was followed by a series of scandals in the wholesale financial markets, including financial benchmark manipulation, front running, and conflicted trading in global derivatives and foreign exchange markets.
These events further motivated policy-makers around the world to tighten their rules.
To that end, the CSA issued proposals intended to help protect participants in the derivatives markets “by improving transparency, increasing accountability, and promoting responsible business conduct” in the OTC markets.
The CSA said its proposals are designed to establish a “robust regime that is tailored for OTC derivatives markets, meets IOSCO’s [the International Organization of Securities Commissions’] international standards, and creates a market conduct regime that is also consistent with the regulatory approach taken by most IOSCO jurisdictions with active derivatives markets.”
Among other things, the proposals would set standards for fair dealing, addressing conflicts of interest, suitability and disclosure in derivatives markets. They are also intended to create uniform regulation for these markets across the country.
Many of the rule’s provisions are similar to the requirements for securities markets, and the CSA indicated it’s monitoring implementation of the client-focused reforms in the securities sector, and “will consider whether comparable provisions are appropriate for the OTC derivatives market in the future.”
For now, the proposals, which underwent two rounds of prior consultation in 2017 and 2018, have been revised in response to feedback received on those earlier versions — including comments that called for the CSA to tailor its conduct rules for OTC markets, warning about possible negative impacts on market liquidity, and detailing the effects of regulation in other jurisdictions.
The CSA said it has “accepted the majority of the comments” and has revised its earlier proposals in response, to “streamline the operationalization of [its] requirements and to ensure that access to derivatives products will not be unduly limited for investors/customers in the Canadian OTC derivatives markets and that costs will remain competitive.”
For instance, among other things, the CSA proposes new exemptions for foreign liquidity providers and derivatives subadvisers, while also streamlining existing exemptions. It also revised its definition of an “eligible derivatives party” — market participants that don’t require the same level of protection as retail investors.
“The proposed rule represents one in a series of important milestones in the regulation of over-the-counter-derivatives that will align Canada with international standards,” said Louis Morisset, CSA chair, and president and CEO of the Autorité des marchés financiers (AMF), in a release.
“Following a careful review of submissions received during our second consultation, we have made revisions and introduced proposed changes that will preserve access to international market liquidity providers and reduce the impact of compliance costs while protecting against market abuse.”
The latest set of proposals is out for comment until March 21.