U.S.-based firms lash out at the OSC

Trade reporting is fundamental to enhancing oversight in the OTC derivatives market, as is a significant step toward improving transparency in what traditionally has been a relatively opaque market; such reporting also facilitates further reforms in the OTC markets.

Yet, this essential element of the Canadian Securities Administrators’ (CSA) reform efforts has not had an easy road so far. First, the CSA had to delay its initial implementation plans because none of the firms that operate trade repositories were prepared to provide trade reporting within the CSA’s initial timeline. Ultimately, three U.S.-based firms – Chicago Mercantile Exchange Inc., DTCC Data Repository (U.S.) LLC and ICE Trade Vault LLC – began providing the trade reporting service in Canada last October. Now, these firms are dismayed with a large fee increase the OSC is proposing.

In mid-September, the OSC proposed an overhaul of its fees, the most notable feature being the regulator’s decision to revert to setting market participation fees based upon a firm’s most recent financial year rather than upon an historical reference year. Based upon the comments submitted about those proposals, that move is supported in general.

The one group that’s not happy with the OSC’s proposals is the trade repositories. They’re facing a sharp increase in their participation fees, to $75,000 a year from $30,000, with an additional $25,000 charged if those firms collect more than 50% of the trade reports in any particular asset class.

The OSC says the planned fee hike is necessary because the current fee won’t be enough to cover the cost of ongoing oversight of the trade repositories. The OSC estimates that its proposed fees will be closer to the actual costs of overseeing these firms.

Not surprisingly, these firms are upset with the proposed increase. For one, they point out that the increase is substantial and affects the economics of providing their services. As well, higher regulatory fees imposed upon the trade repositories may, in turn, mean that they must hike their own fees.

“A 150% increase to the annual [trade repository] registration fee is exorbitant and sets an unfair precedent for capital-market participants in Ontario,” says ICE’s comment on the OSC’s proposals.

That comment points out that the OSC is introducing trade reporting to comply with Canada’s commitments to the G20 (part of the global effort to enhance oversight of OTC derivatives markets in the wake of the financial crisis), but that Canadian regulators aren’t willing to go to through the trouble and expense of building their own trade-reporting facilities. Instead, regulators are relying upon commercial providers to fulfil this role.

The ICE comment says the firm “performed a thorough analysis of costs and potential revenue when deciding whether to enter the Canadian market” and the proposed fee increase would upend that calculation.

The ICE comment notes that “such a large and unexpected fee increase” jeopardizes the firm’s financial viability in Ontario and will require ICE to hike its fees to its customers. As well, ICE would need to “adopt additional precautionary measures to guard against future unexpected fee increases.”

Moreover, the depository trade-reporting firms are upset that these regulatory fee hikes are being introduced just a few months since trade reporting became mandatory. (In fact, the proposals were made before trade reporting had begun in Canada.) The firms’ submissions argue that the OSC is not in a good position to judge the cost of providing oversight so soon after these firms started operations.

DTCC’s comment suggests that it would be better for the OSC to assess the costs of providing oversight after the full implementation of the trade-reporting requirements takes effect.

Although trade reporting began as of Oct. 31 for dealers and clearing agencies, so-called “end-users” – firms that use derivatives for risk-management or hedging – don’t have to start reporting to the trade repositories until June 30, and end-users have until the end of 2015 to report their existing trades. (Dealers have to report their existing transactions by April 30.)

According to the DTCC’s comment: “[By the end of the year], the OSC may find it can rely on services provided by a designated trade repository to mitigate the need for expanded OSC infrastructure.”

The trade repositories’ comments also suggest that: the $25,000 surcharge for firms collecting more than 50% of the reports for any specific asset class doesn’t truly reflect additional oversight costs; the measure seems arbitrary; and the increased fees makes budgeting for regulatory costs more difficult.

© 2015 Investment Executive. All rights reserved.