Derivatives and Business Conduct
The regulatory framework established by the British Columbia Securities Commission (BCSC) concerning the business conduct of derivatives firms specifically addressing National Instrument 93-101, titled “Derivatives: Business Conduct,” is grounded in the Securities Act, R.S.B.C. 1996, c. 418, s. 184.
The regulation begins by providing a detailed list of definitions that establish the scope of the new rules. These include key terms such as CIRO (Canadian Investment Regulatory Organization), which serves as the primary regulatory body overseeing investment and derivatives firms. Collateral is defined as cash, securities, or other property held by a derivatives firm to secure, settle, or guarantee a transaction. The term Commercial Hedger refers to a person or business entity that uses derivatives to hedge risks related to assets, liabilities, or services, offering protection to businesses engaged in financial risk management. A Commodity Derivative is defined as a derivative with an underlying commodity, such as metals, energy, or agricultural products, excluding currency. The roles of Derivatives Adviser and Dealer are clarified, with the adviser providing advice on derivatives and the dealer engaging in trading them. There are specific distinctions for Québec, aligning with the Québec Derivatives Act. The concept of an Eligible Derivatives Party outlines which entities, such as Canadian financial institutions, pension funds, and other large regulated bodies, can participate in derivatives transactions. A Managed Account is defined as one in which a third party makes trading decisions, typically without the need for express consent for each transaction, ensuring proper oversight.
A central element of the framework is the distinction between eligible and non-eligible derivatives parties. Eligible parties include larger institutions like banks, pension funds, and investment dealers, which generally have more experience and financial resources. These parties are subject to fewer restrictions compared to non-eligible parties, such as smaller entities or individuals, who require more protection due to their lower financial capacity and knowledge of complex financial instruments.
The regulation also covers referral arrangements, ensuring that any compensation paid for referring derivatives parties to other firms is transparent and free of conflicts of interest. This provision aims to foster fair practices in referral-based business relationships, promoting accountability within the industry.
The primary goal of National Instrument 93-101 is to regulate the conduct of derivatives firms in British Columbia and more broadly across Canada. The new rules aim to mitigate these risks by setting clear standards for how firms should manage derivatives transactions, particularly when dealing with non-eligible parties who may be less familiar with these instruments.
The detailed definitions and operational guidelines in the instrument are designed to promote transparency and protect both institutional and non-institutional investors from potential abuses or excessive risk-taking by derivatives firms.
British Columbia (269/2024) September 24, 2024