Canada Keeps Pace with OTC Derivatives Commitments

Terry Flanagan

Canada is on track to meeting its G20 commitment to have derivatives reforms in place by the end of 2012, with a flurry of consultation papers published or due to be published covering the gamut of OTC reforms.

So far in 2012, the Canadian Securities Administrators, an association of provincial and territorial securities regulators in Canada, have published consultation papers on segregation and portability of derivatives (91-404), end user exemptions (91-405) and central counterparty clearing (91-406).

Before the end of the year, the CSA will publish consultations on registration (91-407), exchange and platform trading (91-408), and capital and collateral (91-409).

In response to the economic and financial crisis, G20 leaders initiated a reform of the OTC derivatives markets in 2009 to improve transparency, mitigate systemic risk and protect against market abuse.

“The unprecedented and far-reaching rules mandated by Basel II, Dodd-Frank, MiFiD and Emir are triggering sweeping industry changes that encompass OTC derivatives and swaps trading, central clearing, counterparty risk, regulatory capital requirements, margin and collateral management, and regulatory compliance and reporting,” said Ed Elgerzawy, partner in SunGard’s consulting services arm.

On October 1, the Bank of Canada issued a statement on behalf of all Canadian banking authorizes urging all derivatives market participants to clear their contracts through central counterparties (CCPs), and that it judged the CCPs now in operation to be in compliance with four key criteria: fair and open access by market participants to CCPs, co-operative oversight arrangements for CCPs between relevant authorities, resolution and recovery regimes that aim to ensure the core functions of CCPs are maintained during times of crisis, and appropriate emergency liquidity arrangements for CCPs in currencies in which they clear.

According to the statement, Canadian authorities “are satisfied with the direction and pace of the international efforts on the four safeguards, including with regard to implementation at global CCPs serving the Canadian market”.

Canadian authorities will continue to work with authorities in other jurisdictions towards the achievement of the four safeguards at global CCPs and will monitor the evolution of the market for clearing services, according to the Bank of Canada statement.

The Bank of Canada announcement is significant in that it “allows banks to connect to central utilities”, said Chris DeBrusk, managing director at Rule Financial, a consultancy.

The consultation paper on OTC Clearing (91-406), published in June, details recommendations on issues such as the process for determining which OTC derivatives should be subject to mandatory CCP clearing, the regulation and governance of CCPs, clearing member access and risk management.

The consultation paper on Segregation and Portability (91-404), published in February, recommends that clearing members be required to segregate customer collateral from their own proprietary assets and that for all OTC derivatives, CCPs must employ an account structure that enables efficient identification of positions and collateral belonging to the customers of a clearing member.

Although relatively small, the Canadian OTC derivatives market does not function in isolation, according to a client note by law firm Stikeman Elliott.

“Given the importance of OTC derivatives trading in Canada, the number of large Canadian financial institutions active in the global derivatives market, and the plethora of legislative reforms elsewhere, the need for measures in Canada to avoid potential regulatory arbitrage opportunities is clear,” according to the note.

This theme has been echoed by the Canadian Market Infrastructure Committee, a group of leading Canadian financial institutions.

In a letter to regulators on September 21, the CMIC encouraged the CSA to work closely with its global counterparts and other international bodies toward the common goal of meeting the G20 commitments.

“Having a Canadian regime that is not aligned with global standards would place Canadian participants at a severe competitive disadvantage,” the CMIC said.

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