Navigating the New Canadian Derivatives Landscape: Key Changes and Compliance Steps for 2025

The Canadian financial sector is on the brink of significant regulatory changes that will reshape the country’s derivatives market. Starting with the effective date of the Canadian Business Conduct Rules on September 28, 2024, Canada will embark on a year of regulatory transition in the derivatives industry, culminating in a rewrite of the Canadian derivatives reporting rules scheduled to take effect on July 25, 2025. These changes aim to harmonize Canadian business conduct and trade reporting standards with global requirements, including those in the U.S., EU, and UK. Institutions must act swiftly to align their existing practices with the requirements and complete necessary outreach to their counterparties to ensure compliance with the new rules.

A Changed Derivatives Outlook for Canada

1. Canadian Business Conduct Rules – These rules, set to take effect on September 28, 2024, introduce a comprehensive regulatory framework aimed at enhancing business conduct standards for derivatives dealers and advisers in Canada, harmonizing Canadian rules with existing major regulatory regimes.

• • Relief for Eligible Derivatives Party (EDP) Transactions: These rules offer relief when a dealer is transacting with a sophisticated counterparty known as an EDP.
  • Enhanced Obligations for Non-EDP Transactions: Additional obligations are imposed for transactions with a counterparty lacking the requisite level of sophistication, known as a Non-EDP.
  • Elimination of Financial Threshold: Elimination of the $10M CDN financial threshold for commercial hedgers.
  • Streamlined Requirements: Streamlined requirements for registered derivatives advisers.
  • Transition Period: A transition period of up to five years to facilitate compliance (i.e., for counterparties with existing qualifying representations, such as an Eligible Contract Participant representation for U.S. Dodd-Frank compliance).
  • Outreach for Compliance: Canadian dealers are strongly encouraged to conduct outreach to collect the required representations needed to comply with the Business Conduct Rules prior to the September 28 effective date.
  • The International Swaps and Derivatives Association (ISDA) Canadian Representation Letter: A new version of the ISDA Canadian Representation Letter is available on the S&P Global ISDA Amend platform to help facilitate compliance prior to the effective date. Access the ISDA Amend Working Groups.

2. Canada Deposit Insurance Corporation (CDIC) Eligible Financial Contracts (EFC) Bylaw – The CDIC EFC Bylaw mandates that all federal member institutions ensure that their EFCs include stay provisions enabling them to comply with resolution authority under CDIC rules. These provisions limit the exercise of certain rights by counterparties when a resolution order is made, aiming to prevent large-scale terminations of EFCs.

• • Application Dates: The bylaw applies to EFCs entered into, amended, or renewed on or after October 1, 2023, for federal member institutions and their affiliates.
  • Compliance Deadline for Other Parties: EFCs with other parties must come into compliance by October 1, 2024.
  • Review and Amend EFCs: Before these dates, institutions must review and amend their EFCs to include the required stay provisions, which can be done using the ISDA Jurisdictional Modular Protocol, which will soon be available on the S&P Global ISDA Amend platform.

3. Canadian Derivatives Reporting Rules Rewrite – The Canadian Securities Administrators (CSA) have finalized a comprehensive rewrite of the Canadian trade reporting rules, set to take effect on July 25, 2025. This rewrite introduces several key changes, including the shift to a T+2 reporting deadline for non-dealer creation and lifecycle data, harmonization of local party definitions and data elements with global standards, and the requirement for Unique Product Identifiers (UPIs) across all asset classes.

• • Updates Required: Firms must update their reporting systems to meet the new deadlines, implement verification protocols, and prepare for position-level reporting.
  • New Requirement for Counterparty Identification: In addition to the above changes, firms will now be required to implement enhanced counterparty identification processes. This includes the mandatory use of Legal Entity Identifiers (LEIs) for all counterparties involved in derivative transactions. LEIs must be obtained and maintained to ensure accurate and consistent reporting across all jurisdictions.
  • Outreach to Counterparties: Firms must also assess whether outreach will be required for counterparties to ensure that they have the data elements required by the new rules.

What Your Institution Needs to Do

1. Conduct Outreach to Collect Representations: Institutions must conduct comprehensive outreach to counterparties to ensure compliance with the new regulatory requirements across all three regimes.

• • Canadian Business Conduct Rules: Institutions should reach out to collect the required representations, particularly the categorization of counterparties as EDPs or Non-EDPs by the effective date of September 28, 2024.
  • CDIC EFC Bylaw: Institutions need to inform counterparties of the new stay provisions and ensure their compliance by October 1, 2024 if they are parties other than federal member institutions and their affiliates.
  • Canadian Derivatives Reporting Rules Rewrite: Institutions should assess whether outreach is required to ensure that counterparties have the necessary data elements, including the mandatory use of LEIs, and are aware of the new T+2 reporting deadlines and other data element requirements.

2. Review and Update Compliance Procedures: Canadian derivatives dealers and advisers must review and update internal compliance procedures to align with the new business conduct standards, focusing on the elimination of the $10M financial threshold for commercial hedgers and streamlined requirements for registered derivatives advisers.
3. Implement Enhanced Counterparty Identification: Implement processes for identifying and categorizing counterparties as EDPs or Non-EDPs, ensuring that additional obligations are met for transactions with Non-EDPs, and include the mandatory use of LEIs for all counterparties involved in derivative transactions and ensure that LEIs are obtained and maintained for accurate and consistent reporting.
4. Review and Amend EFCs: Review and amend EFCs to include the required stay provisions for remaining other parties by October 1, 2024.
5. Update Reporting Systems: Update reporting systems to meet the new T+2 reporting deadlines for non-dealer creation and lifecycle data before July 25, 2025.
6. Implement Verification Protocols: Implement verification protocols to ensure the accuracy of reported data, establishing procedures for verifying data and promptly correcting errors.
7. Prepare for Position-Level Reporting: Prepare systems and processes for position-level reporting for certain contracts for difference and derivatives with commodities other than cash or currency as the underlying interest.

Key Dates

• September 28, 2024: Implementation of the new Business Conduct Rules.
• October 1, 2024: Compliance deadline for the CDIC EFC Bylaw for other parties.
• July 25, 2025: Effective date of the rewrite to Canadian Reporting Rules.
• September 2029: Expiration of the five-year transition period for Business Conduct Rules.

Conclusion

The upcoming regulatory changes in the Canadian derivatives market require immediate and decisive action. With the Canadian Business Conduct Rules becoming effective on September 28, 2024, the CDIC EFC Bylaw on October 1, 2024, and the Canadian Derivatives Reporting Rules rewrite on July 25, 2025, institutions must conduct outreach to counterparties, update compliance procedures, implement enhanced counterparty identification, amend EFCs, and update reporting systems. Watch the latest on-demand webinar on ‘Are you prepared for the Canadian Business Conduct Rules?’

S&P Global's subject matter experts are here to provide the insight and support you need to smoothly navigate these transitions. Reach out for support to ensure that your institution is fully prepared for these pivotal changes. For more information, to get in touch and to learn more about the related services, visit the Counterparty Manager Suite of Solutions.