As the capital markets continue to evolve, the Ontario Securities Commission (the OSC) and its regulatory priorities have to change with them. The OSC charges market participants two types of fees: participation fees, which serve as a proxy for use of the Ontario capital markets and are based on the costs of a range of OSC services that can not be attributed to individual entities or activities, and activity fees which are generally charged when specified documents are filed with the OSC. To reflect the growth in Ontario’s derivatives over-the-counter (OTC) market activities, and with a view to reducing the regulatory burden on smaller and medium-sized businesses, the OSC is proposing amendments to OSC Rule 13-502 Fees, OSC Rule 13-503 (Commodity Futures Act) Fees and their related companion policies (collectively, the Fee Rule). The Fee Rule will introduce a new fee for entities that enter into OTC derivatives transactions but reduce participation fees for certain reporting issuers and registrants, and eliminate certain activity and late fees.

The new derivatives participation fee is intended to help fund some of the OSC’s multi-year initiatives, including a derivatives regulatory oversight program and technology modernization projects. The consultation draft for the Fee Rule notes that there is over $60 trillion of outstanding notional and over 3.7 million OTC derivative transactions outstanding, which is monitored and analyzed by the OSC, along with 2.4 billion records a year that they receive. In order to monitor systemic risk, including identifying vulnerabilities such as market fragmentation, access to liquidity and price formation trends, the OSC will add participation fees payable by entities engaged in the trading of OTC derivatives, which will be a tiered fee based on an entity’s outstanding average daily notional of all transactions that are required to be reported under OSC Rule 91-507 Trade Repositories and Derivatives Data Reporting over a one year period (provided the fee payer’s average outstanding notional is over $3 billion). It is anticipated that the new fee will mainly impact banks that are derivatives dealers. The tiers range from a $3,000 fee for entities with outstanding notional amounts from $3 billion to under $7.5 billion, to a whopping $1.9 million annual fee for entities with outstanding notional amounts of $10 trillion and over. The OSC expects to raise approximately $13.5 million annually through the new participation fee. The new fee will eliminate the cross-subsidization of regulatory oversight costs by other market participants.

On the other hand, the OSC expects that over 5,500 market participants will save approximately $5.6 million annually through reductions in specific fees, approximately $3.1 million of which would come from modest reductions in certain participation fees paid by registrants and reporting issuers. For example, the lowest participation fee tier for registrants with specified Ontario revenues for the year of under $250,000 would be reduced from $835 to $700. Of note, the fee payable on exempt distribution filings under National Instrument 45-106 Prospectus Exemptions (NI 45-106) would be reduced from $500 to $350, and the calculation based on gross proceeds for distributions of securities of an issuer using the offering memorandum exemption under section 2.9 of NI 45-106 would be replaced by the $350 fee. Certain infrequently used activity fees would be eliminated. Perhaps most welcome would be the proposal to permanently eliminate late fees on filings for certain registration form updates, including outside business activities (soon to be outside activities – see article below).

Also welcome news is the proposal to simplify the annual capital markets participation fee calculation. Currently, registrants are required to estimate their specified Ontario revenues, and adjust the filings if needed based on actual revenues. The proposals would instead accept a fee calculation based on the most recent completed financial statements – i.e. actual financial information based upon the most recently audited financial statements. The deadline for registrant firms to file would be moved from December 1 to anytime between September 1 and November 1. It should be noted that while some late fees would be eliminated under the proposal, the calculation of the late fees for those that will still be imposed would be calculated based on calendar days, and not business days.

If the Fee Rule moves forward, the fee changes are anticipated to become effective on April 3, 2023. Comments on the proposal will be accepted until April 21, 2022.

January 31, 2022