The Canadian Securities Administrators is proposing to wade into the murky waters of the over-the-counter derivatives market to introduce regulation that would fulfill Canada’s G20 commitments.

In a consultation paper released by the CSA Derivatives Committee, regulators propose a number of steps to improve regulation of OTC derivatives in markets in Canada. The paper calls for:

> 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;

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

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

It also recommends that provincial regulators obtain the necessary authority to conduct surveillance in OTC derivatives markets, develop robust market conduct standards and obtain the authority to investigate and bring enforcement action against abusive practices in the OTC derivatives market.

The consultation paper is out for comment until January 14, 2011. Adoption of the recommendations contained in the paper will be the subject of another public consultation paper, the CSA says.

The paper singles out a number of areas in which the regulators foresee the need for further study. They include the location and type of central counterparty to be used, and determining the scope of a regulatory mandate for electronic trading.

The CSA anticipates that in order to implement many of the recommendations regulators will need to develop information sharing and co-operation agreements with other international regulators, foreign trade repositories and central counterparty clearing houses. — JAMES LANGTON