From the Regulators

The proposals aim to guard against systemic risk and boost customer protection in derivatives markets

By James Langton |

The Canadian Securities Administrators (CSA) published proposed rules on Thursday that aim to ensure customers are adequately protected in the process of clearing over-the-counter (OTC) derivatives trades and that clearing agencies are able to withstand a default by a clearing intermediary.

The CSA's proposals establish requirements for the treatment of customer collateral, including standards for the collection, segregation and use of collateral, among other things.

The proposed rules also set record-keeping and disclosure requirements for both clearing intermediaries and regulated clearing agencies in the OTC derivatives market. In addition, they create a framework to facilitate the transfer of customer positions and collateral if a clearing intermediary defaults or falls into insolvency.

"These requirements are intended to ensure that customer collateral is protected, particularly in the case of financial difficulties of a clearing intermediary," the CSA says in the proposals. 

The CSA's proposed rules feature several changes from a version of these requirements issued in 2014, including changes designed to enable firms to use a broader range of clearing models, particularly models offered by clearing agencies based outside Canada. To that end, the proposals allow for "substituted compliance" in situations in which a foreign entity is involved in a transaction and foreign laws apply.

"To enhance customer protection, the approval and oversight process for recognized or exempt clearing agencies will involve a thorough review of the customer safeguards provided by each clearing agency offering customer clearing in a jurisdiction of Canada," the CSA notes in its proposals.

The proposals have also been revised to narrow the application of the requirements and to allow multiple clearing intermediaries to be involved in a transaction. 

The primary benefits of the proposed new rules are the reduction of systemic risk and the enhanced protection of customers and their assets when they indirectly clear OTC derivatives through clearing agencies, the CSA says.

Complying with the enhanced collateral protection, record-keeping and reporting requirements may increase costs on clearing intermediaries and regulated clearing agencies that will likely be passed on to customers, the CSA notes. However, it says that any added compliance costs are proportional to the benefits that the proposals aim to provide.

"The proposed instrument introduces key investor protection measures and systemic benefits to the Canadian market for clearing OTC derivatives," says Louis Morisset, the CSA's chairman and president and CEO of the Autorité des marchés financiers, in a statement. "The G20 has recognized that standardized and sufficiently liquid OTC derivatives transactions cleared through central counterparties have a role to play in effectively managing counterparty credit risk."

In the proposals, the CSA notes that it has also recently published a proposed rule establishing requirements for clearing agencies; it says that a rule on mandatory central counterparty (CCP) clearing is coming soon and recommends that all of these proposals be considered together. Comments on the proposals are due by April 19.