The Canadian Securities
Administrators released a consultation paper
today intended to build on earlier proposals to construct a
framework for the treatment of market participant collateral in
centrally cleared OTC derivatives transactions. Specifically, the
paper addresses the segregation of assets put forward as collateral
for OTC derivatives transactions cleared through a central
counterparty by customers that access the CCP indirectly through
clearing members. The paper also addresses the transfer of customer
collateral and customer positions upon the default or insolvency of
the clearing member of a CCP.
According to the CSA, the paper's recommendations are
intended to ensure that "CCPs clearing OTC derivatives possess
adequate rules and infrastructure to facilitate the segregation and
portability of collateral in a manner that provides market
participants with appropriate protections". To that end, the
paper recommends, among other things: (i) that clearing members be
required to segregate customer collateral from their own
proprietary assets and that the Complete Legal Segregation Model
(whereby all customers' collateral is permitted to be held on
an omnibus basis, but is recorded and attributed by both the CCP
and clearing member to each customer based on their collateral
advanced) be employed; (ii) that if CCPs or clearing members are
permitted to reinvest posted customer collateral, investments
should be restricted to instruments with minimal credit, market and
liquidity risk; (iii) that CCPs should hold customer collateral at
one or more supervised and regulated entities that have robust
accounting practices, safekeeping procedures and internal controls;
(iv) requiring CCPs to make the segregation and portability
arrangements contained in their rules and policies available to the
public in a clear and accessible manner; (v) that provincial market
regulators enact rules requiring that every OTC derivatives CCP be
structured to facilitate the portability of customer positions and
collateral; and (vi) that parties to an uncleared OTC derivatives
transaction be free to negotiate the level of segregation required
The CSA is accepting public comment on the consultation paper,
including with respect to the specific questions posed regarding
its recommendations, until April 10, 2012.
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