Proposed Derivatives Rule Modernization, Stage 1

Following the publication for comments by the Canadian Securities Administrators (CSA) of proposed National Instrument 93-101 – Derivatives: Business Conduct (NI 93-101) and National Instrument 93-102 – Derivatives: Registration (NI 93-102), IIROC performed a complete review of all its Dealer Member related rules (IIROC Rules) to determine:

• IIROC and CSA rule inconsistencies that would be created should proposed NI 93-101 and NI 93-102 be adopted;
• areas where the derivatives-related scope of application of the IIROC Rules is either unclear or too narrow and that could benefit from rule scope clarification amendments;
• areas where the derivatives-related IIROC Rules are out of date, taking into consideration recent rule revisions announced by other jurisdictions/bodies, and that could benefit from rule enhancements; and
• areas of inconsistency within the IIROC Rules between the regulation of securities-related activities

and the regulation of derivatives-related activities that are not justified and could benefit from rule amendments to address these inconsistencies.

IIROC has also recently announced the implementation of its plain language rules1 which has not only resulted in more clearly stated rule requirements but also helped identify inconsistencies in the regulatory treatment of both listed and over-the-counter (OTC) derivatives.

The objectives of the proposed amendments arising from IIROC’s Derivatives Rule Modernization project are to:

• ensure our rules continue to be materially harmonized with the equivalent CSA requirements as they apply to securities and derivatives;
• more clearly specify which of the core regulatory obligations apply to securities, listed derivatives and OTC derivatives; and
• eliminate inconsistencies in the regulatory treatment of securities, listed derivatives and OTC derivatives, where justified.

Due to the extent and the nature of these proposed amendments we are publishing them for public comment in two separate stages as follows:

• Stage 1, this set of amendments, includes all amendments we propose to make other than those relating to margin requirements; and
• Stage 2 will include the amendments we propose to make to the margin requirements.

Within Stage 1 we are proposing to:

• expand, where appropriate, the scope of the IIROC Rules that apply only to:
  • securities-related activities to also apply to derivatives-related activities;
  • activities involving futures and listed options to also apply to OTC derivatives [including contracts for difference (CFDs) and foreign exchange contracts (Forex)]; and
• adopt, where appropriate, requirements/standards announced by other jurisdictions/bodies.

Stage 2 will include proposed amendments to current margin requirements in order to adequately constrain leverage and address margin requirements. Stage 2 will be published for public comment at a later date.

Two important considerations/objectives in developing these proposed amendments were that all rule amendments pursued should:

• where possible and appropriate, avoid the creation of new regulatory arbitrage situations and reduce or eliminate existing regulatory arbitrage situations; and
• result in the consistent regulation of all securities-related and derivatives-related activities occurring within a Dealer Member.