Derivatives Laws And Regulations Canada 2024

1.1 Please provide an overview of the documentation (or framework of documentation) on which derivatives transactions are typically entered into in your jurisdiction. Please note whether there are variances in the documentation for certain types of derivatives transactions or counterparties; for example, differences between over-the-counter ("OTC") and exchange-traded derivatives ("ETD") or for particular asset classes.

In the realm of Canadian OTC derivatives transactions, counterparties often lean towards either the 2002 or, to a lesser extent, the 1992 form of the ISDA Master Agreement. In situations where the timing or financial dynamics require immediate action before finalising an ISDA Master Agreement, counterparties may opt for a long-form confirmation, albeit temporarily.

The ISDA Master Agreement is designed to facilitate OTC derivatives transactions between counterparties. It provides a standardised set of terms and conditions that govern the rights and obligations of the parties to the transactions. The Master Agreement covers various types of derivatives, including interest rate swaps, credit default swaps, foreign exchange derivatives, and others.

Within Canada, the exchange-traded derivatives are subject to central clearing, overseen by the Canadian Derivatives Clearing Corporation, serving as the principal counterparty for such agreements. Negotiations surrounding exchange-traded derivatives are generally limited in scope, with documentation typically standardised by the relevant exchange, with the Montreal Exchange as the main venue for derivatives trading in the country.

1.2 Are there any particular documentary or execution requirements in your jurisdiction? For example, requirements as to notaries, number of signatories, or corporate authorisations.

There are no specific documentary or execution requirements mandated solely for derivatives transactions. Corporate law across Canada diverges depending on the province or territory in question; however, the process and applicable rules for signing and delivering a legally enforceable contract generally hinge on the constitutional documents of the executing party.

1.3 Which governing law is most often specified in ISDA documentation in your jurisdiction? Will the courts in your jurisdiction give effect to any choice of foreign law in the parties' derivatives documentation? If the parties do not specify a choice of law in their derivatives contracts, what are the main principles in your jurisdiction that will determine the governing law of the contract?

In Canada, ISDA documentation typically specifies Canadian law or the laws of a particular province or territory as the governing law. Parties may also opt for New York or UK law when dealing with foreign counterparties. When two Canadian parties are involved, the choice of law often favours a Canadian province or territory, with British Columbia, Alberta, Ontario, and Quebec being the most common choices, given that they are captured by the ISDA Netting Opinion.

In ISDA agreements between two Canadian parties, Section 13(b)(i) of the ISDA Master Agreement is often customised to grant jurisdiction to the courts of the chosen Canadian jurisdiction, ensuring alignment with local legal frameworks and facilitating resolution in familiar jurisdictions.

When foreign law is chosen to govern ISDA documentation and deemed legally binding and enforceable, Canadian courts typically uphold this choice. In the absence of an explicit governing law provision, courts consider the legal system most closely and substantially connected to the transactions under the agreement. Factors such as the parties' domicile and residence, the principal place of business of corporations, the location of contract execution and performance, linguistic considerations in contract drafting, validity or voidness of stipulations under different laws, economic ties with other transactions, the nature and subject matter of the contract, the corporation's head office location, and other relevant factors aid in determining the governing law.

2.1 What forms of credit support are typically provided for derivatives transactions in your jurisdiction? How is this typically documented? For example, under an ISDA Credit Support Annex or Credit Support Deed.

In Canada, credit support for derivatives transactions primarily relies on liquid assets like major currencies such as CAD, EUR, and USD, or easily tradable securities, including government-issued debt instruments. These arrangements typically adopt a New York law-governed version of the 1995 or 2016 ISDA Support Annex, with modifications to adhere to the specific laws of Canadian provinces or territories.

In the case of institutional lenders holding pre-existing secured credit facilities with the counterparty, it is customary for the current security frameworks to extend coverage to derivatives transactions, contingent upon the inclusion of these transactions in the applicable documentation respecting the security.

2.2 Where transactions are collateralised, would this typically be by way of title transfer, by way of security, or a mixture of both methods?

Presently, transactions involving collateralisation typically rely on the creation of security interests, allowing for collateral to serve as a security for the performance of obligations without transferring ownership. Personal property security laws in Canadian provinces prevent secured creditors from perfecting security interests over a deposit account by way of control. As such, clauses in respect of the New York law-governed form of Credit Support Annex aiming to establish a security interest require amendments in order to allow for the transfer of credit in support of cash.

Recent Canadian jurisprudence suggests a risk of courts interpreting such provisions of a Credit Support Annex as establishing a "security interest". Consequently, Canadian counterparties opt to register a financing statement in the applicable jurisdiction to guarantee proper perfection of the interest in the provided collateral.

2.3 What types of assets are acceptable in your jurisdiction as credit support for obligations under derivatives documentation?

Assets allocated for credit support are typically characterised by high liquidity and include government debt instruments and/or cash. Presently, Canada is in the midst of rolling out margin stipulations for derivatives not centrally cleared.

The Office of the Superintendent of Financial Services ("OSFI") enacted margin directives effective April 2020 in respect of federally regulated financial institutions. Per these directives, acceptable collateral is restricted to cash holdings, gold reserves, specific debt securities meeting predetermined ratings, unrated debt securities meeting issuer rating thresholds, publicly traded equities, and select collective investment vehicles. Under provincial domains, although it is anticipated that local regulatory bodies will furnish advice, the Canadian Securities Administrators announced a postponement in the publication of the rule governing margin requirements for non-centrally cleared OTC derivatives on April 8, 2021. Since April of 2023, no additional information has been revealed.

2.4 Are there specific margining requirements in your jurisdiction to collateralise all or certain classes of derivatives transactions? For example, are there requirements as to the posting of initial margin or variation margin between counterparties?

Federally, OSFI released guidelines laying down minimum benchmarks for margin directives concerning derivatives transactions not centrally cleared that are carried out by federally regulated financial institutions. This framework stipulates that federally regulated financial institutions engaging in such transactions with other federally regulated financial institutions must exchange variation margins and two-way initial margins, with a ceiling of up to $75 million. This is contingent upon each federally regulated financial institution having a combined month-end average exposure of non-centrally cleared derivatives for the months of March, April and May of the preceding year surpassing $12 billion.

Although there are expectations for more comprehensive regulations at the provincial levels to undergo public review, the Canadian Securities Administrators have suggested that the publication for review of the rule enforcing margin directives in respect of OTC non-centrally cleared derivatives will face further postponement.

2.5 Does your jurisdiction recognise the role of an agent or trustee to enter into relevant agreements or appropriate collateral/enforce security (as applicable)? Does your jurisdiction recognise trusts?

Yes, Canada recognises the role of an agent or trustee to enter into relevant agreements or arrange collateral/enforce security in the context of derivatives transactions. The legal framework governing derivatives transactions in Canada acknowledges the use of agents or trustees to act on behalf of parties involved in such transactions.

2.6 What are the required formalities to create and/or perfect a valid security over an asset? Are there any regulatory or similar consents required with respect to the enforcement of security?

In Canada, the regulations surrounding personal property security are managed independently by each province and territory. Within the common law jurisdictions, excluding Quebec, there are specific pieces of legislation directing personal property security and security transfers. The Securities Transfer Acts and Personal Property Security Acts oversee the process of perfecting security interests, typically achieved via registration, or in some instances, possession or control.

Perfecting a security interest by registration involves filing a registration in the applicable personal property registry, which is established by accounting for the location of the collateral and the debtor, the nature of the collateral and the relevant conflict of laws where the debtor or collateral are interjurisdictional. The process of registration can be completed prior to the formation of the security interest, and except for certain types of registrations, priority rankings are dictated as of the order in which competing secured parties registered their financing statements. It is worth noting that perfecting by registration can be overridden by super-priority debt obligations under the relevant statute, such as outstanding tax payments and/or other liabilities relating to a defined benefits pension.

In the realm of securities, while achieving perfection through registration is a recognised avenue, it does not afford the utmost level of security. This status is reserved for security interests established by way of control, which can ultimately override those established through registration irrespective of whether control is obtained before or after registering a financing statement. The particular protocols for determining control differ based on whether the security is certificated, uncertificated or held within a securities account. Achieving perfection through control characterises the highest level of security attainment for a secured creditor.

3.1 Please provide an overview of the key derivatives regulation(s) applicable in your jurisdiction and the regulatory authorities with principal oversight.

Canada's securities landscape operates within a dual framework regulatory regime. Reporting, clearing and margin requirements are subject to federal oversight by OSFI, while local specific derivatives markets are governed by the relevant provincial regulatory body. Below are the regulatory authorities overseeing the provincial and territorial securities regime:

1. Alberta – Alberta Securities Commission.
2. British Columbia – British Columbia Securities Commission.
3. Manitoba – Manitoba Securities Commission.
4. New Brunswick – Financial and Consumer Services Commission.
5. Newfoundland and Labrador – Office of the Superintendent of Securities of the Service.
6. Northwest Territories – Northwest Territories Securities Office.
7. Nova Scotia – Nova Scotia Securities Commission.
8. Nunavut – Nunavut Securities Office.
9. Ontario – Ontario Securities Commission.
10. Prince Edward Island – Office of the Superintendent of Securities.
11. Québec – Autorité des marchés financiers.
12. Saskatchewan – Financial and Consumer Affairs Authority.
13. Yukon Territories – Office of the Superintendent of Securities.

The federal Bank Act confers upon OSFI expansive powers of oversight and regulation over specific organisations such as trust and loan companies, specified federally overseen pension plans and federally regulated financial institutions. Within this realm, OSFI issues guidelines aimed at establishing norms for industry conduct and operations. Notable among these directives is Guideline No. B-7, "Derivatives Sound Practices", outlining broad principles for federally regulated financial institutions' engagement in derivatives transactions. Similarly, Guideline No. E-22, "Margin Requirements for Non-Centrally Cleared Derivatives", mandates baseline margin requirements for such derivatives, encompassing both initial and variation margins.

Under the provincial and territorial framework, derivatives typically operate under the purview of the jurisdiction's securities framework, and are thus governed by the respective Securities Act, with the exception of Quebec, where derivatives are regulated under the Derivatives Act (Quebec). In addressing futures contracts, several provinces have established specific legislation, such as the respective Commodity Futures Acts in Ontario and Manitoba, and the Commodity Contract Act in British Columbia. These frameworks confer broad authority upon local securities regulators for overseeing securities activities within their jurisdictions. While each securities commission operates locally, there exists extensive collaboration among provincial and territorial entities to harmonise diverse local securities frameworks. Regulations pertaining to local securities laws, denoted as "instruments", are categorised as either "National Instruments" or "Multilateral Instruments", and those exclusively governed by local jurisdiction are known as "Local Instruments". The instruments adhere to a standardised indexing protocol, typically commencing with category identifier "9" in respect of derivatives-related instruments.

3.2 Are there any regulatory changes anticipated, or incoming, in your jurisdiction that are likely to have an impact on entry into derivatives transactions and/or counterparties to derivatives transactions? If so, what are these key changes and their timeline for implementation?

As OSFI gradually implements margin requirements for non-centrally cleared derivatives regarding federally regulated financial institutions, there are presently no corresponding regulations issued by provincial securities regulators for entities within their jurisdictions. In April of 2021, the Canadian Securities Administrators released a notice indicating an additional delay in publication, citing that this delay would not heighten systemic risk to Canadian markets or participants thereof. The timeline for the release of these margin rules for public commentary remains uncertain.

3.3 Are there any further practical or regulatory requirements for counterparties wishing to enter into derivatives transactions in your jurisdiction? For example, obtaining and/or maintaining certain licences, consents or authorisations (governmental, regulatory, shareholder or otherwise) or the delegating of certain regulatory responsibilities to an entity with broader regulatory permissions.

On September 28, 2023, the regulatory authorities of the Canadian Securities Administrators announced the adoption of Multilateral Instrument 93-101 Derivatives: Business Conduct ("MI 93-101") and the Companion Policy 93-101 Derivatives: Business Conduct, slated to come into effect on September 28, 2024. The Instrument sets out a "comprehensive regime for regulating the business conduct of dealers and advisers in the OTC derivatives market, meeting the international standards of the International Organization of Securities Commissions". OTC dealers and advisors will be subject to a new regulatory framework imposing requirements on conflicts of interest, fair dealing, reporting non-compliance and recordkeeping. The Instrument is intended to protect OTC derivatives market participants from unfair, improper and/or fraudulent practices to promote increased confidence in Canadian financial markets. The Canadian Securities Administrators intend to turn the MI into a National Instrument upon the adoption by the British Columbia Securities Commission of substantially similar rules at a later date.

Among other requirements, the following are key obligations that derivatives parties must comply with under MI 93-101:

• Fair dealing: derivatives firms and individuals acting on behalf of a derivatives firm must "act fairly, honestly and in good faith with a derivative party".
• Conflicts of interest: derivatives firms must "establish, maintain and apply reasonable policies and procedures to identify all material conflicts of interests" and respond to any conflicts of interests discovered.
• Know your derivatives party ("KYDP"): other than a registered firm or a Canadian financial institution, derivatives firms must develop reasonable policies to appropriately verify the derivatives party's identity, make reasonable inquiries as to the reputation of the derivatives party, determine whether the derivatives party is an insider of a reporting issuer or if they would "reasonably be expected to have access to material non-public information related to any interest underlying the derivative" and establish the creditworthiness of a derivatives party. Additional requirements exist for establishing the identity of a derivatives party that is a trust, partnership or corporation.
• Handling complaints: derivatives firms must document all complaints made about any "product or service offered by the derivatives" advisor or dealer, and must respond to each complaint promptly in a manner that a "reasonable person would consider fair and effective".
• Tied selling: derivatives firms or individuals acting on the firm's behalf are prohibited from coercing a person or company to obtain derivatives-related products or services from a particular person or company (which includes the derivatives firm or an affiliate thereof).

If the derivatives firm is in business with (i) a non-eligible derivatives party, or (ii) an individual or an eligible derivatives party that is either an individual or commercial hedger that has not waived the protections, additional obligations will be required:

• Suitability: derivatives firms must take reasonable steps to ensure that the derivative and the transaction are suitable for the derivatives party prior to making any recommendations to or transacting in a derivative.
• Permitted referrals: unless a set of exceptions applies, a derivatives firm and any individual acting on behalf of it is prohibited from participating in a referral arrangement in respect of a derivative with another person or company.

Other obligations can include additional relationship disclosure information, pre-transaction disclosure, valuation reporting, and notice to derivatives parties by non-resident derivatives dealers.

Before transacting in a derivative, a derivatives firm must enter into a derivatives party agreement with the derivatives party that sets out the relationship between the derivatives firm and party. It must keep records of its derivatives transactions and advising activities in accordance with the guidelines set out in the Instrument. With the exception of Manitoba, all records must be kept for seven years from the date the record is created. In Manitoba, the record is kept for eight years.

According to National Instrument 94-101 Mandatory Central Counterparty Clearing of Derivatives ("NI 94-101"), specific interest rate swaps and forward rate agreements are mandated for clearing through a regulated clearing agency if one of the counterparties is Canadian and is classified within the below categories:

1. a participant engaging the services of a regulated clearing agency for a required clearable derivative;
2. an affiliated entity of a participant as delineated in the item above, provided it maintained an average month-end gross notional amount exceeding $1 billion in outstanding OTC derivatives for the months of March, April, and May before the reference period in which the transaction transpired, excluding intra-group transactions; or
3. a local counterparty, along with its local related entities, holding a month-end gross notional amount surpassing $500 billion in outstanding OTC derivatives over the preceding 12 months, excluding intra-group transactions, and an average month-end gross notional amount exceeding $1 billion in outstanding OTC derivatives for the months of March, April, and May before the reference period in which the transaction unfolded.

Nonetheless, NI 94-101 encompasses a segment within item 3 above, detailing counterparties exempt from its purview. Furthermore, it grants exemptions for specific transactions, such as mandatory clearable derivatives between affiliated parties, contingent upon certain conditions. NI 94-101 underwent amendments in January 2022 to enhance the scope of market participants subject to clearing requirements and mitigate regulatory burdens, effective as at September 1, 2022.

3.4 Does your jurisdiction provide any exemptions from regulatory requirements and/or for special treatment for certain types of counterparties (such as pension funds or public bodies)?

As derivatives fall under the jurisdiction of provincial and territorial securities legislation, market participants must adhere to broader securities regulations, which include prospectus obligations. Those participants meeting specific criteria outlined under National Instrument 45-106 Prospectus Exemptions are recognised as "accredited investors" and are thereby exempt from prospectus requirements pursuant to relevant securities laws. Likewise, certain local securities regulators have enforced jurisdiction-specific exemptions for other registration and perspective requirements as per the applicable local legislation; for example, BCSC Blanket Order 91-501 (British Columbia), SFSC General Order 91-907 (Saskatchewan), NBSC LR 91-501 (New Brunswick) and the Derivatives Act (Quebec).

4.1 In what circumstances of distress would a default and/or termination right (each as applicable) arise in your jurisdiction?

Common instances within Canadian financial agreements that qualify as an insolvency default encompass:

1. a party failing to meet its obligations as they mature or acknowledging its inability to fulfil its debts;
2. a party becoming insolvent or engaging in actions indicative of bankruptcy under the Bankruptcy and Insolvency Act (Canada); and
3. the initiation of legal proceedings against a party seeking various forms of relief, such as moratoriums, reorganisations, or the appointment of receivers, trustees, or liquidators, provided said proceedings are not dismissed within a specified timeframe of what is generally within a range of 30–45 days.

In Canada, defaults in respect of insolvency matters largely parallel the bankruptcy terms delineated under Section 5(a)(vii) of both the 1992 and 2002 ISDA Master Agreements referenced under question 1.1 above. Yet, ISDA Master Agreements governed by Canadian law generally revise Section 5(a)(vii) to explicitly encompass any plan of arrangement under corporate legislation concerning creditor compromises or liabilities conversions.

4.2 Are there any automatic stay of creditor action or regulatory intervention regimes in your jurisdiction that may protect the insolvent/bankrupt counterparty or impact the recovery of the close-out amount from an insolvent/bankrupt counterparty? If so, what is the length of such stay of action?

Derivatives transactions are commonly classified as Eligible Financial Contracts under relevant Canadian insolvency statutes, such as the Companies' Creditors Arrangement Act (Canada) and the Bankruptcy and Insolvency Act (Canada). These laws allow for the continuation of netting or offsetting obligations between parties to an Eligible Financial Contract despite creditor action stays. Nevertheless, if the net termination values, as established under the Eligible Financial Contract, yield an indebtedness by the insolvent party, the contract counterparty is regarded as holding a claim in the insolvency proceedings for the respective amount.

4.3 In what circumstances (if any) could an insolvency/bankruptcy official render derivatives transactions void or voidable in your jurisdiction?

Laws respecting insolvency matters in Canada generally include provisions that allow courts to invalidate preferential payments to creditors or property transfers for undervalued consideration made by the insolvent. The timeframe for reviewing such dealings could extend up to five years before the initial bankruptcy event, on a circumstantial basis.

4.4 Are there clawback provisions specified in the legislation of your jurisdiction that could apply to derivatives transactions? If so, in what circumstances could such clawback provisions apply?

As outlined in question 4.3 above, Canadian insolvency laws offer specific provisions for addressing "transfers at undervalue". Such transfers entail the conveyance of property at a significantly reduced rate as compared to its fair market value. Depending on the circumstances, the timeframe for scrutinising these transactions may extend up to five years before the initial bankruptcy event. In the event of a confirmed transfer at undervalue, a court may mandate the recipient of the property or any party involved in the transaction to reimburse the received amount.

4.5 In your jurisdiction, could an insolvency/bankruptcy-related close-out of derivatives transactions be deemed to take effect prior to an insolvency/bankruptcy taking effect?

In cases where parties specifically opt for Automatic Early Termination under the ISDA Master Agreement, a contractual vehicle would be in place for derivatives transactions to cease just before the commencement of insolvency or bankruptcy proceedings. This provision is typically upheld under Canadian legislation, subject to the unique cases involving a defaulting party that is a deposit-taking federally regulated financial institution. However, it is uncommon for Canadian counterparties to elect Automatic Early Termination in an ISDA Master Agreement governed by local law.

4.6 Would a court in your jurisdiction give effect to contractual provisions in a contract (even if such contract is governed by the laws of another country) that have the effect of distributing payments to parties in the order specified in the contract?

In Canada, a court will honour an intercreditor agreement if the parties involved have contractually arranged payment distributions in a specified order, provided the agreement is legally valid. In light of public policy considerations, a contractual provision cannot dictate the allocation of assets to parties not involved in the agreement. Instead, the prioritisation will be determined by federal, provincial, or territorial legislation.

5.1 Has an industry-standard legal opinion been produced in your jurisdiction in respect of the enforceability of close-out netting and/or set-off provisions in derivatives documentation? What are the key legal considerations for parties wishing to net their exposures when closing out derivatives transactions in your jurisdiction?

The ISDA has secured a standard legal opinion validating the effectiveness of close-out netting and set-off provisions in ISDA Master Agreements governed by Alberta, British Columbia, Ontario or Quebec legislation. In cases where parties seek to execute an ISDA Master Agreement governed by provincial laws differing from those specified above, it is customary for them to request an additional netting opinion addressing the extent to which the provisions may be enforced under local laws. Alternatively, they may choose to enter the ISDA Master Agreement with the option for multiple transaction payment netting disabled entirely.

For master agreements governed by Alberta, British Columbia, Ontario or Quebec, the opinion is contingent upon certain conditions and limitations and does not encompass all types of counterparties. By way of example, although the opinion applies to both general and limited partnerships, it does not extend to limited liability partnerships.

5.2 Are there any restrictions in your jurisdiction on close-out netting in respect of all derivatives transactions under a single master agreement, including in the event of an early termination of transactions?

Canada typically provides a favourable environment for netting. However, particularly concerning institutional counterparties, the application of multiple transaction payment netting to transactions under a single master agreement may be restricted by their internal protocols and the feasibility of netting across different product lines. Additionally, as previously mentioned in question 5.1 above, the ISDA's Canadian industry-standard legal opinion strictly spans the laws of the provinces of Alberta, British Columbia, Ontario and Quebec, along with the federal Canadian laws. Parties intending to execute a master agreement governed by laws of other localities not listed in the aforementioned provincial list should seek advice from local counsel in respect of netting as part of their initial due diligence mandates.

Moreover, the effectiveness of netting provisions could face challenges with the onset of insolvency proceedings. Nevertheless, derivatives transactions commonly fall under the classification of Eligible Financial Contracts according to the Bankruptcy and Insolvency Act (Canada), thereby exempting them from the application of stay order issued under these statutes.

5.3 Is Automatic Early Termination ("AET") typically applied/disapplied in your jurisdiction and/or in respect of entities established in your jurisdiction?

No. Insolvency systems in Canada feature an automatic stay, generally incorporating safe-harbour clauses that exempt Eligible Financial Contracts (often encompassing derivatives) from the reach of such automatic stay provisions. It is essential to recognise that certain alternative insolvency or quasi-insolvency systems similarly lack automatic stay provisions for Eligible Financial Contracts. However, it is uncommon for Canadian ISDA Master Agreements to opt for Automatic Early Termination.

5.4 Is it possible for the termination currency to be denominated in a currency other than your domestic currency? Can judgment debts be applied in a currency other than your domestic currency?

While parties have the freedom to select any currency for termination purposes, the Currency Act (Canada) prohibits Canadian courts from rendering judgments in currencies other than Canadian currency. If the agreement includes a currency conversion provision, courts typically adhere to it when determining the Canadian dollar equivalent of a foreign currency. Although Canadian provinces and territories typically have laws enabling courts to establish an exchange rate in cases where none is specified in the contract itself, court discretion may lead to the adoption of an exchange rate different from the one prevailing on the payment date.

6.1 Are derivatives transactions taxed as income or capital in your jurisdiction? Does your answer depend on the asset class?

The taxation status of derivatives transactions in Canada, whether classified as income or capital, depends on how the derivatives contract is characterised, either as a hedge or speculation.

For derivatives contracts characterised as a hedge, gains and losses mirror the nature of the underlying asset, liability, or transaction being hedged. If the hedged item is held on a capital account, gains and losses from the derivatives contract are treated likewise. Conversely, if the hedged item is held on an income account, gains and losses from derivatives are taxed as income.

In contrast, gains and losses on speculative derivatives contracts are determined based on their individual terms, regardless of any underlying asset or transaction. Typically, this results in gains and losses from speculative derivatives being taxed as income in most cases.

Determining whether a derivatives contract is categorised as a hedge or speculation falls under common law principles. Canadian legal precedent indicates that this determination relies on the contract's intended function, primarily influenced by the correlation between the derivatives contract and the underlying asset, liability, or transaction being hedged. The stronger the connection between the derivatives contract and the hedged item, the greater the likelihood that the contract serves a hedging purpose.

6.2 Would part of any payment in respect of derivatives transactions be subject to withholding taxes in your jurisdiction? Does your answer depend on the asset class? If so, what are the typical methods for reducing or limiting exposure to withholding taxes?

In Canada, there is a 25% withholding tax (which can be reduced under a relevant Tax Treaty) on dividends, interest, rents, royalties, and similar payments made to non-residents. Typically, payments related to derivatives transactions are not subject to withholding tax in Canada, even if the payment is based on an amount that would normally be subject to withholding tax (such as dividends or interest).

6.3 Are there any relevant taxation exclusions or exceptions for certain classes of derivatives?

No. Canada does not offer any specific tax exclusions or exceptions for particular derivative classes.

7.1 Are there any material considerations that should be considered by market participants wishing to enter into derivatives transactions in your jurisdiction? Please include any cross-border issues that apply when posting or receiving collateral with foreign counterparties (e.g. restrictions on foreign currencies) or restrictions on transferability (e.g. assignment and novation, including notice mechanics, timings, etc.).

There are no limitations on crafting customised derivatives arrangements and documentation. A Canadian entity can both provide and receive collateral within a derivatives arrangement, and there are no constraints on granting security over assets domiciled in Canada. Transferability is unaffected by legal restrictions. The terms of the agreement pertaining to assignment, novation, notice provisions, and event timing can be tailored to the preferences of the counterparties.

8.1 What has been the most significant change(s), if any, to the way in which derivatives are transacted and/or documented in recent years?

Mirroring trends observed internationally, Canadian derivatives markets have encountered escalating regulatory oversight in recent years. This evolving regulatory landscape entails rising compliance expenses and emphasises the importance of remaining abreast of new protocols and developments, whether disseminated by the ISDA, OSFI, or provincial or territorial securities regulators.

The regulations set forth by the Commodity Futures Trading Commission ("CFTC") are aligned with international initiatives aiming to standardise derivatives data practices, overseen by institutions such as the Bank for International Settlements and the International Organization of Securities Commissions. In line with this global trend, the Canadian Securities Administrators intend to establish similar reporting standards within Canada by 2024. To achieve this goal, Staff Notice 96-305 Derivatives Data Reporting Guidance for CDOR Transition (the "Notice") dated March 7, 2024 proposed amendments to the existing OTC trade reporting rules, comprising Section 32 of Multilateral Instrument 96-101 Trade Repositories and Derivatives Data Reporting and Ontario Securities Commission Rule 91-507 Trade Repositories and Derivatives Data Reporting (collectively, the "Reporting Rules"), applied across Canadian provinces and territories so as to address the discordance throughout this transition period:

• If data falls within the scope of the current Reporting Rules:
  • if similar data is mandated under the CFTC amendments, market participants may adhere to the Reporting Rules by reporting such data using a CFTC data element that aligns with the relevant data element outlined in Appendix A to the Reporting Rules; and
  • if equivalent data is not specified in the CFTC amendments, it remains reportable under the Reporting Rules.
• If data is required under the CFTC amendments but not under the Reporting Rules, it remains non-reportable under the Reporting Rules. However, reporting counterparties have the option to report this data if the corresponding data element is proposed in the Canadian Securities Administrators' amendments and is supported by the designated or recognised trade repository.

The Notice published on March 7, 2024 outlines the following considerations:

• The Financial Stability Board advises the discontinuation of interbank offered rates ("IBORs") and the adoption of alternative reference rates.
• OTC derivatives referencing IBORs implement fallback provisions to ensure functionality post-transition.
• Certain OTC derivatives tied to the Canadian dollar offered rate ("CDOR") must transition to alternative reference rates by July 2, 2024, following CDOR's cessation.
• CDOR transition constitutes a life-cycle event under derivatives data Reporting Rules.
• Reporting counterparties must report life-cycle events to a designated trade repository within one business day.
• Recognising the operational burden, staff acknowledge potential challenges for reporting counterparties transitioning OTC derivatives before July 2, 2024.

Staff do not recommend enforcement actions for late reporting of life-cycle event data if:

• The CDOR transition life-cycle event happens on or before July 2, 2024.
• Life-cycle event data for the CDOR transition is reported within five business days after the event.

Moreover, the discontinuation of the interbank lending rate adds to the level of uncertainty in the Canadian derivatives market. Numerous legacy contracts still exist where counterparties have not followed the ISDA 2020 IBOR Fallbacks Protocol. With CDOR's publication set to cease on June 28, 2024, how counterparties will handle these contracts as the phase-out date approaches remains uncertain.

8.2 What, if any, ongoing or upcoming legal, commercial or technological developments do you see as having the greatest impact on the market for derivatives transactions in your jurisdiction? For example, developments that might have an impact on commercial terms, the volume of trades and/or the main types of products traded, smart contracts or other technological solutions.

It is anticipated that the Canadian Securities Administrators will release regulations concerning margin requirements for non-centrally cleared derivatives, aligning with the standards outlined by the Basel Committee on Banking Supervision and the International Organization of Securities Commissions published in March 2015. While we expect the publication and commencement of public commentary to be relatively soon, as of April 28, 2023, no further updates have been provided on this timeline. Once implemented, this rule will extend beyond federally regulated financial institutions to impact a considerably broader range of counterparties within provincial and territorial jurisdictions.

As discussed in question 3.3 above, the implementation of MI 93-101, a comprehensive regulatory framework for OTC derivatives dealers and advisors, is poised to have a significant impact on the derivatives market in Canada. The implementation of MI 93-101 is expected to enhance market integrity, protect derivatives market participants from unfair practices, and promote increased confidence in Canadian financial markets.

Acknowledgment

The authors would like to acknowledge the contributions of their former colleague, P. Jason Kroft.