The Office of the Superintendent of Financial Institutions (OSFI) finalized margin requirements for non-centrally cleared derivatives on Monday in an effort to curb systemic risk and to encourage more central clearing of derivatives trades.
Specifically, OSFI released its final guidelines that establish margin requirements for trades in non-centrally cleared derivatives by federally regulated financial institutions. OSFI’s guidelines are based on global principles developed by the Basel Committee on Banking Supervision and the International Organization of Securities Commissions (IOSCO) in the wake of the financial crisis.
The imposition of margin requirements on derivatives trades that are not centrally cleared aims to both encourage more central clearing and to reduce systemic risk.
“Margin performs an important risk mitigation function and can offer enhanced protection against counterparty credit risk by ensuring that collateral is available to offset losses caused by the default of a derivative’s counterparty,” OSFI notes.
The new global framework is slated to come into effect on Sept. 1 and OSFI’s requirements will follow that timing.
The final version of these guidelines features some changes from an earlier version that was published for industry consultation in October 2015, OSFI notes.
For example, the requirements will not apply to non-financial firms that are end users of derivatives. OSFI notes that “after careful consideration,” it has decided to exclude non-financial firms from the application of the new guidelines.
The final version of these guidelines include a mechanism for substituted compliance that will allow for deference to foreign derivatives rules when Canadian firms are trading with foreign counterparties, among other changes. In addition, OSFI also explicitly exempts physically settled commodity trades from the new requirements.