Canada, the CSA and the CDE greatest hits

These days reading a transaction reporting consultation paper is like going to see a classic band.  Everyone is wanting the old favourites and groans when they announce anything from the new album.  The long awaited Canadian proposals were published in June and everyone is relieved they’re playing the familiar classics we can singalong to from the multi-platinum CDE greatest hits album.

The following attempts to distil the various proposal documents (request for comment, amended rules, companion policies and the technical manual) into something a bit more digestible. The Canadians are proposing a 2024 implementation so we will see how this plays out.

I’ve assembled a Spotify playlist below and will attempt to discuss some of the proposals. 

The laundry list includes:

• Harmonisation to CDE (Critical Data Elements) and CFTC fields and values
• Harmonisation of UTI with global UTI rules
• Revised UTI dissemination hierarchy
• Adoption of UPI in-line with global alignment to use UPI
• Introduction of collateral and margin data reporting
• Part 49-like requirements for the SDR to perform validations on the data and for reporting firms to perform verifications
• A proposed alternative reporting hierarchy
• Reporting of packages in-line with CFTC approach
• The option to report certain lifecycle events at position level
• Updated requirements for the operation of Trade Repositories
• Updated definition of “derivatives dealer”
• A new ‘Multilateral Derivatives Data Technical Manual’, a tech spec very similar to the CFTC’s
• Termination of an original derivative by a clearing agency.

So, assuming both you and my editor have indulged me with this many bullet points, then let’s dive in.

Harmonisation to CDE and CFTC fields and values

Adoption of CDE fields and harmonisation towards the CDE standards is front and center. The main driver of all these reporting rule revisions globally is harmonisation and interoperability so the focus on CDE fields is sensible and welcome.  The Canadians attribute the remainder of the fields to the following sources:

• CSA
• CFTC
• ESMA

The Canadian tech spec has 140 fields compared to the CFTC’s 128 fields.  This is in part due to the CSA retaining fields such as Master Agreement Version & Master Agreement Type (with new snazzy types) and Broker ID that the Americans dispensed with.  Adoption of some ESMA-inspired fields such as Derivative Based On Crypto-assets helps towards the higher field count.  But the 140 fields still pales in comparison to the 203 fields ESMA is squeezing into the EMIR REFIT.

Where the CFTC only requires a true/false flag for Custom Basket Indicator, the CSA are also proposing Source of the identifier of the basket constituents and Identifier of the basket’s constituents to better understand what’s in the shopping cart.  However, despite being CDE fields both the format and valid values of these fields are defined in the Canadian consultation as “tbd” so it’s more of a statement of intent as it stands. Last month’s ROC consultation on updating CDE to version 3 attempts to (and arguably fails to) provide clarity by suggesting a 350 variable character format maintained by the UPI service provider.

Part 49-like requirements

One proposal that might not be universally welcomed but is understandable is the adoption of Part 49-like proposals around verification “to ensure that all reported derivatives data is accurate and contains no misrepresentation”.  The CSA is proposing that all derivatives dealers and clearing organisations verify the data accuracy at least once every 30 days much like the corresponding CFTC rules.  But unlike the CFTC requirement for certain reporting counterparties (that are not swap dealers, major swap participants or clearing agencies) to undertake a quarterly verification every 90 days, the Canadians are not requiring this and citing the excessive burden.

Thankfully the proposals are not mandating the draconian seven-day limit for fixing any errors discovered in the verification process.  But the proposals are harsher than the CFTC equivalents by enforcing a time limit of the end of the following business day from discovery of an error for notification of that issue.

Option to report certain lifecycle events at position level

Another proposal that’s no doubt well intended but I fear isn’t a good move is the proposal to introduce the ability to report at position level in certain instances where the individual transaction;

(a) has no fixed expiration date, and

(b) is in a class of derivatives in which each transaction is fungible.

This is intended to alleviate the burden of reporting lifecycle events on the individual transactions but regardless of the good intention, I’m not a fan of this proposal as it introduces complexity. ESMA has had position level reporting under EMIR for years and it’s caused more problems than it’s solved. This diverges with the CFTC approach, creates different values for Action Type, divergent workflows and message choreography for reporting firms that are very likely to have a US footprint as well. Clarity and consistency are vital for data quality and this detracts from both.

Termination of an original derivative by a clearing agency

The final contentious proposal is the requirement for the Clearing Agency to terminate the original trade despite not reporting that trade themselves. So Big Bank (BB) trades with Small Hedge Fund (SHF) and BB has the obligation to report the original transaction. This trade (the alpha) is then cleared and replaced by two new trades;

• The beta – cleared trade between BB and Clearing Agency
• The gamma – cleared trade between SHF and Clearing Agency

Here the Clearing Agency would have the obligation to report both the beta and the gamma which is fairly standard and unremarkable.  But the Canadians are proposing that the Clearing Agency also has the obligation to report the termination of the original alpha trade which is a new concept and throws up several logistical and practical considerations for both the Clearing Agency and the party that reported the original transaction.

Multilateral derivatives data technical manual

The final item which I suspect will be welcomed with open arms is the introduction of a much needed Technical Manual. The Canadian regulators are trudging down the same path the CFTC has already trodden from principles-based reporting rules to far more prescriptive (and let’s be honest, more ESMA-like) rules.

If regulators want firms to report accurate high quality data then the clarity of the reporting requirements is paramount. The draft Technical Manual, which clearly owes a lot to the CFTC’s equivalent Parts 43 and 45 Technical Specification, is a huge step towards providing that all important clarity. I suspect and hope that both the CFTC and the Canadians over time will find themselves having to publish further so-called ‘level 3’ guidance such as FAQs and reporting guidelines but in the meantime I commend the Canadian authorities for publishing this Technical Manual.

Next steps

The proposed 2024 implementation is really not that far away. However, it’s likely that the Canadian implementation will be in a year already congested with ESMA’s EMIR Refit and several other reporting rule revisions such as ASIC, MAS and HKMA going live. Some aspects such as the alignment with other reporting regime formats and rules are very welcome.  The production of the technical specifications and the clarity it enables is likewise laudable.  Other aspects such as the verification/notification timelines will see industry pushback.  But at least we have a relatively clear picture of where the Canadian reporting rules are headed and when.

• For a conversation with Alan or one of our regulatory specialists about the quality of your Canadian reporting or any of the topics mentioned above, please contact us.