From the Regulators

The notice is part of regulators’ ongoing efforts at enhancing regulation of over-the-counter derivatives markets

By James Langton |

The Canadian Securities Administrators (CSA) published a notice on Thursday that details the regulators' efforts to enhance segregation and portability arrangements for exchange-traded derivatives markets in Canada, particularly the commodities and financial futures markets.

The CSA says in its notice that it has "engaged extensively with industry stakeholders since 2015 on the question of what is the appropriate CCP segregation and portability model for domestic futures markets."

The CSA reports that there's support for enhancing these arrangements, and general agreement that a gross-customer margin (GCM) model offers superior customer protection.

"We agree that the GCM model offers superior customer protection when compared to collecting margin on a net basis," the CSA's notice says. "It will enhance customer protection, especially by strengthening the ability to port customer positions and collateral in the event of a clearing participant default. It may also reduce systemic risk, by bolstering confidence that losses related to counterparty risk would be manageable."

However, the CSA does not intend to impose a GCM model for now, pointing out that "mandating a particular GCM segregation and portability framework … would be inconsistent with [a principles-based] approach."

Moreover, requiring the GCM model would have implications for certain aspects of the current regime. It may require changes to the Investment Industry Regulatory Organization of Canada's rules on segregation, capital and margin and, potentially, to the coverage the Canadian Investor Protection Fund provides.

In addition, the regulators note that the two central counterparties that clear trades in domestic futures products — Canadian Derivatives Clearing Corp. and ICE Clear — are already implementing GCM models.

The CSA's working group on these issues will continue to meet regularly during 2017; if any rule changes are required, they would have to go through the usual public comment and regulatory approval process.