From the Regulators

Measures intended to strengthen Canada’s financial markets and manage specific risks related to over-the-counter derivatives

By James Langton |

The Canadian Securities Administrators has issued a consultation paper proposing new regulations for the over-the-counter derivatives market.

The CSA is contemplating a number of steps to regulate OTC derivatives in keeping with commitments made to the G20, which has been driving regulatory reform in response to the global financial crisis.

In a paper released Tuesday, the CSA calls for:

> mandatory reporting of all derivatives trades by Canadian counterparties to a trade repository;

> provincial regulators to obtain the authority to mandate electronic trading of OTC derivatives in the short term;

> mandatory central clearing of OTC derivatives that are appropriate for clearing, and capable of being cleared; and

> a risk-based approach to imposing capital and collateral requirements.

The paper, drafted by the CSA Derivatives Committee, also recommends that provincial regulators obtain authority to conduct surveillance on OTC derivatives markets, develop robust market conduct standards for OTC derivatives trading and obtain authority to investigate and enforce against abusive practices in the OTC derivatives market.

“The options and recommendations outlined by the committee are intended to strengthen Canada’s financial markets and manage specific risks related to OTC derivatives, implement G20 commitments in a manner appropriate for our markets, harmonize regulatory oversight to the extent possible with international jurisdictions, all while avoiding causing undue harm to our markets,” the paper says.

The G20 has called for all standardized OTC derivative contracts to be traded on exchanges or electronic trading platforms, and cleared through central counterparties by the end of 2012; OTC derivative contracts to be reported to trade repositories; and for non-centrally cleared contracts to be subject to higher capital requirements.

“As an active participant in the global financial markets, it is fundamental for Canada to respect its G20 commitments,” said Jean St-Gelais, chair of the CSA and president and CEO of the Autorité des marchés financiers. “The comments received from this consultation will help the CSA to develop appropriate legislative and regulatory proposals for Canada’s OTC derivatives markets.”

The committee notes that clear jurisdictional authority in each province, as well as specific rule‐making powers, need to be set out in provincial securities and derivatives legislation. And, in order to implement many of the recommendations in the paper, the CSA will need to develop information sharing and co‐operation agreements with international regulators, foreign trade repositories and central counterparty clearing houses.

The consultation paper is out for comment until January 14, 2011.