Canadian securities regulators are proposing a new registration regime for firms that deal in the derivatives sector, as part of their overall initiative to bring greater oversight to the over-the counter (OTC) derivatives market in the wake of the global financial crisis.

The Canadian Securities Administrators (CSA) published a consultation paper Thursday that sets out the CSA’s proposals for the registration and regulation of firms that trade in derivatives, which establishes a trigger for derivatives registration; proposes various registration categories; and, the obligations derivatives registrants will face.

The registration regime would have three distinct registration categories: derivatives dealers, derivatives advisers and large derivative participants (which would include entities, other than derivatives dealers, that have a substantial derivatives exposure). For each of the proposed categories, the CSA also recommends individual registration requirements for both management and frontline staff that provide advice and trading services, among other things.

The paper also sets out various obligations that would accompany registration, including: minimum proficiency requirements; capital, margin and insurance requirements; compliance systems requirements; an obligation to deal honestly and in good faith; and, obligations relating to the care of collateral posted by clients or counterparties. Derivatives dealers and advisers would also be subject to gatekeeper obligations; conduct requirements such as KYC, suitability, fair dealing and conflict of interest obligations.

The rules also establish the circumstances that will allow exemptions from these requirements. For example, this may include foreign firms that are subject to equivalent regulation; governments; clearing agencies; firms trading solely with affiliated entities; and derivatives dealers providing incidental advice would not also have to register as advisers.

This latest initiative represents the seventh in a series of eight papers establishing a new regulatory framework for oversight of the OTC derivatives market. A final paper on exchange and platform trading is still forthcoming. The CSA notes that it continues to work with foreign regulators to develop international standards that will help shape its final rules, including requirements regarding central counterparty clearing.

“The G20 has called for improvements to the over-the-counter derivatives markets that improve transparency, mitigate systemic risk, and protect against market abuse,” noted Bill Rice, chair of the CSA and chair and CEO of the Alberta Securities Commission (ASC). “Responding to the G20, the CSA has developed key recommendations on the regulation of key participants in Canada’s derivatives markets that will allow Canada to comply with international standards.”

The comment period on the registration paper expires June 17.