CSA finalizes derivatives conduct rules

Rules governing the conduct of dealers and advisers in the over-the-counter (OTC) derivatives market — a relic of the financial crisis — are finally seeing the light of day.

On Thursday members of the Canadian Securities Administrators (CSA) adopted a final rule that introduces a regulatory oversight regime for players in the OTC derivatives market.

Among other things, the new rules, which take effect Sept. 28, 2024, set standards for fair dealing, addressing conflicts of interest, know-your-counterparty, suitability and record keeping.

In a notice detailing the new rule and its requirements, the CSA noted that Canada is the only G20 country that has not set business conduct standards for OTC derivatives markets.

The global financial crisis exposed the risks of largely unregulated derivatives markets, which led to large investor losses.

In the wake of the crisis, episodes such as the LIBOR market manipulation scandal revealed further evidence of widespread misconduct in the derivatives markets, including financial benchmark manipulation, front running, and pervasive conflicts of interest.

In response, the regulators crafted rules “to address this significant regulatory gap in order to help protect market participants, reduce risks, including potential systemic risk, as well as improve transparency, increase accountability, and promote responsible business conduct in OTC derivatives markets.”

The rule, which was developed after a series of consultations, adopts the kinds of market conduct standards that are familiar in other parts of the securities market, but tailored for the derivatives space.

The CSA said its rule “will establish a robust market conduct regime that is tailored for OTC derivatives markets, meets [the International Organization of Securities Commissions’] international standards, and is harmonized both within Canada and with the regulatory approach taken by most IOSCO jurisdictions with active derivatives markets.”

Following the latest consultation, the final version of the rule “was streamlined to address potential negative impacts on derivatives market liquidity and to reduce implementation burden by better enabling firms to leverage their existing compliance systems,” the CSA said.

The regulators also noted they are monitoring the effects of the client-focused reforms in securities markets and will consider whether comparable provisions are appropriate for the OTC derivatives market.

“Derivatives play a critical role in our financial system, and these robust standards provide valuable protections to participants in the Canadian OTC market,” said Stan Magidson, chair of the CSA, and chair and CEO of the Alberta Securities Commission, in a release.

“This key milestone could not have been achieved without our stakeholders’ meaningful participation and commentary during the entire consultation process,” Magidson said.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.