By James Langton

(December 11 – 16:40 ET) – The Ontario Securities Commission has had its proposed rule covering over-the-counter derivatives returned by the Minister of Finance for further consideration.

On September 8, the OSC sent its rule on the OTC derivatives market to the minister for approval. It is now revealing that on November 2, the minister returned the rule to the commission, “for further consideration by the commission of the need for the rule, especially in regard to the balance between the costs and other restrictions on market participants and the objectives of the rule.” In other words, the rule would be trouble than it’s worth, hindering markets too much for the expected benefit.

The latest version of the rule was published for comment on January 7. The OSC received one comment from the Canadian Bankers Association. As a result of that comment the commission made a few changes to the rule, but it didn’t deem them material, so the OSC went ahead with the rule in final form.

In that comment the CBA restated its view that the OTC derivatives market doesn’t need a rule. It believes that OTC derivatives are an integral part of the business of banking and are subject to federal, not provincial jurisdiction. The commission responded that it “continues to believe that the rule has been carefully tailored to focus on investor protection in the retail market and is therefore designed to protect those least able to protect themselves.”

The CBA also reiterated a concern that the rule would make Ontario uncompetitive on the world derivatives scene. The OSC rejected this view, too, insisting that the large number of exemptions to the rule will keep this from happening.

Instead, the minister proposes a more targeted rule, asking, “whether the commission’s objectives in connection with the regulation of over-the-counter derivatives can be achieved by a rule that identifies the specific classes of transactions and related parties that will be regulated as opposed to having provisions of the Securities Act apply to all over-the-counter derivatives transactions and then providing exemptions from that application.”

The rule deals with the regulation of transactions consisting of OTC derivatives. The most common derivatives products used in the OTC market are swaps, options and forwards on a variety of underlying interests. The rule provides complete exemptions from Ontario securities law for some transactions and provides exemptions from the registration and prospectus requirements of the Act for other transactions.

The OSC says the minister indicated that, “a more detailed review of the nature and extent of any disclosure issues in retail over-the-counter derivatives transactions would be helpful in determining the appropriate approach.”