Economy & Markets

A new membership category, Limited Clearing Members, would allow certain buy-side firms to clear cash or repo trades directly through CDCC

By James Langton |

Canadian Derivatives Clearing Corp. (CDCC) on Thursday announced a proposal to expand its fixed income service to give pension funds and certain other buy-side firms direct access to repo market clearing.

The expansion is designed to enhance systemic stability, and reduce the likelihood of the market seizing up as it did during the financial crisis.

As part of the proposal, CDCC is launching a new membership category, Limited Clearing Members (LCMs), which would allow certain buy-side firms to clear cash or repo trades directly through CDCC. Subject to regulatory approval, CDCC is planning to start adding firms to the new category in 2018.

The initiative is in line with the Bank of Canada's objective of encouraging central clearing of over-the-counter (OTC) instruments, following the financial crisis.

"Expanding membership to include buy-side participation will greatly reduce the likelihood of repeating the liquidity pressure that occurred in the Canadian repo market during the crisis of 2008," CDCC says in a notice published Thursday outlining its plans.

The introduction of the new category is expected to help foster liquidity in the repo market under both stressed market conditions, and normal conditions, CDCC says. As a result, it will contribute to the "financial strength and resilience" of the central counterparty (CCP), it adds.

Additionally, expanding direct access will give the CDCC a clearer picture of trading activity, which will enable it to better manage risk. As well, introducing collateral requirements on transactions that would otherwise take place over-the-counter, "will reduce leverage in the system and contribute to enhanced resiliency and reduced systemic risk," CDCC says.

The proposed new category and direct-clearing model has been developed in consultation with the industry, pension funds, securities regulators, the Bank of Canada, and the Investment Industry Association of Canada (IIAC), CDCC notes.

"The participation of public pension funds on CDCC's fixed-income central clearing service provides sell-side participants with important netting and balance sheet efficiencies, which increases their capacity to provide liquidity to the marketplace," sys Ian Russell, president and CEO of the IIAC, in a statement.

"This new industry driven solution will serve to boost the efficiency, resiliency and capacity of our country's capital markets while enabling LCMs to follow the Financial Stability Board's best practice recommendations," adds Glenn Goucher, president of CDCC.