One of the central lessons from the financial crisis is that transparency is critical – a message that has Canadian regulators toiling to enhance their oversight of some historically opaque corners of the financial markets.

Late last year, the Canadian Securities Administrators (CSA) proposed a set of rules that would lay the groundwork for greater oversight of the over-the-counter (OTC) derivatives markets. And in late February, the Investment Industry Regulatory Organization of Canada (IIROC) unveiled its proposal to intensify its surveillance of another largely OTC realm, the fixed-income market.

Ultimately, both initiatives have their roots in the financial crisis. The move to bolster transparency and oversight of the OTC derivatives markets is, of course, a direct consequence of the crisis. In its immediate aftermath, G20 policy-makers identified the shortage of transparency in derivatives markets as a contributing factor to the severity of the crisis and so agreed to institute reforms.

The importance of augmenting oversight of the debt markets reflects both the basic lesson about the necessity of regulators having a clear picture of markets and, indirectly, the increased reliance on debt securities that has emerged in the wake of the crisis. A notice outlining IIROC’s proposals reports that the value of trading in 2012 in the domestic bond market was approximately $10 trillion, with money market trading represented an additional $6.7 trillion, compared with about $1.9 trillion for equities.

The IIROC paper notes that as the markets evolve (and grow increasingly complex), it’s important that regulatory oversight evolves in tandem. Thus, IIROC has been stepping up its attention regarding fixed-income markets, recently adopting a rule to address the fair pricing of OTC securities and enhance its trade-desk compliance examinations. Nevertheless, IIROC remains concerned about the lack of systematic regulatory reporting and transparency in this sphere.

Thus, IIROC is proposing a new rule that would require dealers to report all debt-market transactions, including trades executed on an alternative trading system (ATS) or through an interdealer bond broker on a post-trade basis. The regulator also is setting out a plan to create a system to collect and scrutinize that trade data, which would replace the existing market-trade reporting system operated by the Bank of Canada.

The IIROC paper says this reporting will enable the regulator to build a comprehensive database of transaction information, enabling improved oversight of OTC debt trading. Although this will bolster regulatory transparency and improve IIROC’s ability to ensure compliance and prevent market abuses, it will not necessarily enhance investor transparency, as IIROC doesn’t plan to report data on individual transactions publicly. Instead, IIROC will continue to publish aggregate debt-trading statistics.

The issue of public transparency in the debt markets is being addressed by the CSA, says Wendy Rudd, senior vice president, market regulation and policy, with IIROC: “IIROC’s priority is to ensure timely surveillance of debt-market activity.”

@page_break@As for public transparency, the CSA has repeatedly deferred plans to impose specific requirements, most recently pushing out the introduction of any requirements for government-debt transparency until 2015.

In the derivatives markets, the push for greater transparency is a part of a global imperative to reform. In 2009, the G20 agreed that all OTC derivative transactions should be reported to trade repositories. (Other commitments include increased exchange trading and central clearing for standardized contracts.)

The original goal was to have these reforms in place by the end of 2012. That deadline has passed, but, late last year, the CSA published its first set of actual rule proposals, which set out the types of instruments that would have to report to trade repositories, requirements for trade reporting and the operation of those repositories.

The comment period for this initial set of proposals wrapped up in early February, to no shortage of concerns. In particular, commenters voiced worries about: just what instruments will have to be reported; who has to report, and to whom; and that the CSA may be exceeding the limits of its jurisdiction with some of these requirements. There also were concerns about what will be publicly disclosed and the prospects for ensuring harmonization in the requirements among the provinces and with the rest of the world.

The comment from the Canadian Market Infrastructure Committee (CMIC) – an industry group composed of the big banks, pension funds and other financial services firms – spells out many of these worries, arguing that certain definitions in the CSA proposals are “excessively broad” and could have the effect of imposing obligations on firms that are outside the Canadian regulators’ traditional jurisdiction.

The CMIC also is concerned about the CSA’s plan to report aggregated data. Its comment warns that, given the relatively small Canadian market, public disclosure will mean that traders may be able to figure out each other’s positions and trading strategies, which could facilitate arbitrage and market manipulation, thereby undermining market confidence.

Another concern is harmonization. Several comments expressed real concerns about the adoption of these reforms at the provincial level, where there currently is little consistency in how derivatives are regulated.

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