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Conduct Completed! CSA Publishes Final Version of Derivatives Business Conduct Rule

October 4, 2023 Capital Markets & Securities Bulletin 6 minute read

On September 28, 2023, the Canadian Securities Administrators (the “CSA”) published the long-anticipated Multilateral Instrument 93-101 Derivatives: Business Conduct (the “Instrument”)[1] and its companion policy, Companion Policy 93-101 Derivatives: Business Conduct (the “Companion Policy”). The Instrument governs business conduct in over-the-counter (“OTC”) derivatives markets in order to protect market participants, reduce risks, and foster confidence in Canada’s financial markets.

We previously discussed the first draft of Proposed Instrument 93-101 and its companion policy during the initial period for request for comments in our bulletin from April 2017. The first draft was published on April 4, 2017 and remained open for a lengthy 150-day comment period.

A second draft was published on June 14, 2018, with one of the main changes being the introduction of the term “specified commercial hedger” in the eligible derivatives party definition. The second draft was open for a 90-day comment period, during which submissions were received from 21 commenters.

A third draft was published on January 20, 2022. The main changes in the third draft were the elimination of the $10 million financial threshold for the “eligible commercial hedger” category in the definition of eligible derivatives party and the introduction of a foreign liquidity provider exemption for foreign dealers. The third draft was open for a 60-day comment period, during which submissions were received from 10 commenters. We discussed the third draft in our bulletin from February 2022.

In this publication, rather than describe the Instrument in its entirety, we will highlight the changes made from the third draft to the final Instrument. These changes were made in response to comments received during the third consultation period.

Key Changes to NI 93-101

Changes to EDP Definition

The definition of eligible derivatives party (“EDP”) is perhaps the most important provision in the Instrument. The obligations of derivatives dealers and derivatives advisers with respect to EDPs are considerably less onerous than those with respect to derivatives parties which are not EDPs.

The definition of EDP previously included a person or company, other than an individual, who was a “commercial hedger”, provided they satisfied certain conditions. The final Instrument amends the definition to permit sole proprietors who satisfy the “commercial hedger” conditions to qualify as EDPs. The final Instrument also requires derivatives firms to identify and document the exact nature of the business of the individual commercial hedger and the related risks. The Companion Policy clarifies that the individual commercial hedger exemption is not intended to be used in connection with an individual’s personal investing activities. The Companion Policy states that the regulators will monitor how this exemption is used and will take necessary measures to prevent misuse.

The Companion Policy also clarifies that a derivatives firm may not rely on a representation from a derivatives party that it is a commercial hedger if it has “…grounds to believe there may not be a reasonable link between the commercial risks the derivatives party is hedging and the transaction entered into.”

The second notable change to the EDP definition is the deletion of the “knowledge and experience” representation that was included in the asset-based prongs of the definition. This change aligns the EDP test with the bright line approach used to determine status under Canadian securities legislation for entities such as “permitted clients”. It is sufficient for a derivatives firm to confirm the amount of net assets owned by an entity or financial assets owned by an individual without obtaining further representations regarding knowledge and experience from such entity or individual.

Exemption From Certain Requirements for Certain Notional Amounts of Derivatives Activity

The notional amount exemption exempts derivatives dealers from various requirements in the Instrument if such derivatives dealers only transact with and advise EDPs and have less than a certain gross notional amount of derivatives outstanding. The final version of the Instrument amends this exception in two ways.

Firstly, commodities dealers are one of two types of derivatives dealers eligible to benefit from the exemption. The final Instrument increases the threshold used to determine whether a commodity derivatives dealer qualifies for the exemption from CAD3 billion to CAD10 billion in gross notional amount of derivatives outstanding, which will allow significantly more commodity dealers to qualify for the exemption. This amendment aims to align the exemption more closely with exemptions available to commodities firms in the US and European Union, recognizing the cross-border nature of OTC derivatives markets and regulation.

Secondly, the final Instrument reduces the requirements that derivatives dealers (both commodity derivatives dealers with less than CAD10 billion in gross notional amount sand other derivatives dealers with less than CAD250 million in gross notional amount) must comply with if they qualify for the notional amount exemption. Derivatives dealers operating under the exemption are now relieved of all obligations under the Instrument, except the obligation to deliver a trade confirmation [section 28], the fair dealing provision [section 9], and the conflict of interest requirement [section 10]. Prior to this amendment, the exemption only relieved derivatives dealers from senior manager requirements.

Short-Term FX 

The Companion Policy clearly confirms that the inclusion of wholesale short-term foreign exchange contracts in the Instrument for limited purposes is meant to “overlay” various obligations that certain derivatives firms (generally, the major Canadian banks) have already assumed under internal compliance policies or the Global FX Code. The regulators do not intend that the inclusion of these instruments will require derivatives firms to obtain any certifications or representations from counterparties.

Valuation Statement Requirements

The requirement for a derivatives adviser to provide a valuation statement to a noneligible derivatives party or an eligible derivatives party who is either an individual or eligible commercial hedger that has not completed a waiver is now every three months rather than monthly unless the derivatives party requests monthly statements.

The requirement for a derivatives dealer to provide daily valuations to a noneligible derivatives party or an eligible derivatives party who is either an individual or eligible commercial hedger that has not completed a waiver remains unchanged.

Registered Advisers Exemption

Section 48 of the Instrument exempts advisers registered under securities or commodity futures legislation from certain obligations, which are set out in Appendix F of the Instrument, if such registered advisers comply with the comparable requirements of securities legislation. Appendix B of the Companion Policy sets out the securities legislation provisions that registered securities advisers must comply with in order to rely on the registered advisers exemption in the Instrument. Additionally, the Companion Policy clarifies that registered securities advisers which engage in derivative advising activities must include derivatives related risks in the risk disclosure delivered pursuant to securities legislation.

Specified Foreign Jurisdictions for Substituted Compliance

The final Instrument adds Norway and Iceland to the list of foreign jurisdictions where foreign derivatives dealers, derivatives advisers and derivatives sub-advisers can benefit from the exemptions available under the Instrument. These countries were added given that their outcomes-based derivatives regulations are comparable to the Instrument. The CSA anticipates adding additional countries with comparable regimes to this list in the future.

Record Retention Requirements 

Except in Manitoba, applicable records are now required to be retained for 7 years from the record creation date. The retention period in Manitoba is 8 years. This amendment links the retention period to the record creation date rather than the expiry of the transaction, aligning the recordkeeping requirements with those in NI 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations. The Instrument does not alter record retention requirements which arise under securities legislation, including over-the-counter derivatives trade reporting rules.

Transition Provisions

The Instrument changes various aspects of the transition provisions found in Part 8.

Part 8 of the Instrument lists certain sophisticated entities who qualify as EDPs during the transition period, which begins on September 28, 2024 and ends on September 28, 2029. These entities qualify as EDPs during the transition period if they have provided derivatives firms with certain representations prior to the Instrument’s effective date. As such, derivatives firms have until September 28, 2029 to obtain representations from these entities to confirm that they are EDPs. The final version of the Instrument adds additional types of entities to this list, the most important being non-individual accredited investors in Ontario. This is a significant change considering that the accredited investor definition includes parties with substantially less assets than those included in all the other categories.

Under the Instrument, individuals and commercial hedgers who otherwise qualify as EDPs will only be classified as such if they provide a derivatives firm with a written statement waiving specified protections in the Instrument. The final Instrument was amended to grant derivatives firms one year after the effective date to obtain such waivers (i.e. the waivers must be obtained by September 28, 2025). During this one-year period, the core obligations of the Instrument continue to apply.

Effective Date

The Instrument along with the Companion Policy comes into force on September 28, 2024 (exactly one year from the date of publication) and has been adopted in each province and territory, except for British Columbia. The British Columbia Securities Commission intends to publish a substantially similar instrument in the future – also anticipated to take effect September 28, 2024 – at which point the Instrument will become a National Instrument.


With the final Instrument and Compliance Policy now published, derivatives firms can continue their implementation of its requirements with confidence in the fact that no further revisions are expected before the effective date. We are available to assist any derivatives firms who require assistance with understanding their obligations or putting in place policies and procedures which reflect the requirements set out in the Instrument.

The Instrument and the Companion Policy are the product of numerous consultations among the CSA, derivatives dealers, derivatives advisers and end users. While the Instrument imposes a considerable burden on derivatives firms (almost certainly substantially greater than the estimates of such burden which appeared in the notice accompanying the third draft of the Instrument), the CSA has taken steps to ensure that the burden is imposed only where necessary to protect derivatives parties.

[1] The Instrument is currently a Multilateral Instrument because British Columbia has not yet published its version of the Instrument.  British Columbia securities legislation requires specific references to the legislation of specified foreign jurisdictions in order to provide exemptions and the review of such legislation is in the process of being completed.

by Shahen A. Mirakian and Veronica Russo (Articling Student)

A Cautionary Note

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2023

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