Close of businesswoman making announcement in paper trumpet

Federal banking regulator the Office of the Superintendent of Financial Institutions (OSFI) is proposing revisions to the capital rules for over-the-counter (OTC) derivatives.

OSFI has launched an industry consultation on proposed changes to the treatment of credit valuation adjustments (CVA) and market risk hedges for OTC derivatives.

Among other things, the proposed revisions are intended to enhance risk sensitivity and to improve the robustness of this aspect of the capital rules.

The regulator said that the proposals are in line with the international standards set by the Basel Committee on Banking Supervision and aim to implement the final set of Basel III reforms.

“These new proposed reforms complement the final set of Basel III reforms and seek to enhance the way institutions calculate risk-weighted assets for derivatives transactions,” said Ben Gully, OSFI’s assistant superintendent, regulation sector, in a release.

“The changes will improve the comparability and transparency of institutions’ capital ratios and advance a more resilient bank regulatory regime in Canada that protects depositors, maintains market confidence and promotes continued financial stability, especially during times of stress,” he added.

In a letter to the industry outlining its proposals, OSFI said that it participated in the development of the Basel Committee’s final CVA requirements.

Its proposed guidance on CVA risk for the Canadian banks then used the Basel framework as its starting point, with adjustments “to reflect the Canadian market.”

The proposals are out for comment until July 30.

OSFI expects to finalize its rules in late 2021, with the new requirements taking effect in the first quarter of fiscal 2024.