Adoption of big regulatory changes must avoid unintentional harm

The Office of the Superintendent of Financial Institutions (OSFI) has issued proposed changes to its derivatives guideline, which sets out the regulator’s expectations for the use of derivatives among federally regulated pension plans.

Specifically, the changes set out the factors that pension plan administrators are expected to consider when developing policies and procedures for managing the risk of their derivative activities.

“While derivatives can be effective tools for risk mitigation, the associated risks must be identified, measured, monitored and controlled as part of a pension plan’s comprehensive risk management framework,” OSFI says.

The guideline covers market risk, counterparty credit risk, liquidity and operational risk, along with stress-testing procedures.

The proposed changes are designed to modernize the guideline to reflect current practices for the risk-management of derivatives activities. They cover both exchange-traded and over-the-counter (OTC) derivatives, and aim to address pension plans that trade in derivatives indirectly through funds, such as pooled funds and hedge funds.

Comments on the proposals are due by Sept. 29.

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