Canada: Canadian Securities Administrators Release Consultation Paper 91-404

Last Updated: February 20 2012
Article by Carol E. Derk and Stephen J. Redican

Most Read Contributor in Canada, November 2017

On February 10, 2012, the Canadian Securities Administrators Derivatives Committee (the "Committee") released its Consultation Paper 91-404 ("Consultation Paper 91-404") on Segregation and Portability in OTC Derivatives Clearing. Consultation Paper 91-404 is part of a series of eight papers that expand on the proposals for the regulation of over-the-counter ("OTC") derivatives set out in Consultation Paper 91-401. Please see our earlier client alert, entitled Over-The-Counter (OTC) Derivatives Market in Canada: On the Road to Reform and Regulation, regarding Consultation Paper 91-401. The other papers in this series that have been published to date are Consultation Paper 91-402 on Trade Repositories (published June 23, 2011) and Consultation Paper 91-403 on Surveillance and Enforcement (published November 25, 2011). The remaining five papers are expected to be published over the next few months.

The Committee acknowledges that rules developed for the Canadian derivatives market must be consistent with international practice in order to ensure that Canadian market participants and financial market infrastructures have full access to the international market. One of the fundamental premises of OTC derivatives regulation is the introduction of mandatory clearing of all OTC derivatives that are determined to be appropriate for clearing and capable of being cleared. It is expected that all central counterparties ("CCPs") will have very rigorous eligibility requirements for direct participation as a clearing member. As a result, it is likely that most buy-side participants and smaller financial intermediaries may not qualify as a direct clearing member and will need to clear their trades indirectly through a third party. All proposed rules regarding the segregation and portability of customer collateral need to address both the direct and indirect clearing of OTC derivatives trades.

Under derivative transactions, there are typically two types of collateral requirements – initial margin and variation margin. Initial margin is the collateral that is posted at the beginning of the trade to protect against replacement cost losses due to potential future movements in contract value, counterparty default and counterparty credit risk. Variation margin is collateral that is posted from time to time during the trade based on changes in the market value of the derivatives contract. Consultation Paper 91-404 focuses on two important issues in connection with the posting of collateral: segregation and portability.


Segregation refers to the separation of the collateral posted by a customer from the other assets of the clearing member or CCP. Some of the existing legislation in Canada, including the Québec Derivatives Act and the Commodity Futures Act of both Ontario and Manitoba, already contain segregation requirements. Under the Dodd-Frank Act in the United States, any person holding collateral in connection with cleared swaps is required to be registered and must segregate customer collateral from their own assets and separately account for such collateral. In addition, customer collateral that is posted by a defaulting clearing member cannot be applied to the clearing member's proprietary positions and customer collateral cannot be used to margin or guarantee derivative trades of other customers. Similar to the Dodd-Frank requirements, the Committee recommends that clearing members must segregate customer collateral from their own proprietary assets and that all CCPs have in place an account structure that enables the efficient identification and segregation of positions and collateral belonging to the customers of a clearing member from the positions and collateral of the clearing member's other customers as well as those that belong to the clearing member itself.


Portability refers to the ability to facilitate a timely and efficient transfer of customer accounts from one clearing member to one or more other clearing members. The concept of portability is particularly important in the context of the insolvency or default of a clearing member. When examining any collateral and segregation model, the portability of customer positions and related collateral is a key mechanism to ensure that if a clearing member defaults or becomes insolvent, its customer positions are not terminated and customer positions and collateral can be transferred to one or more non-defaulting clearing members without having to liquidate and re-establish the positions. This portability feature is important to allow customers to maintain continuous clearing access and to promote efficient financial markets.


The Committee considers various international approaches and segregation models to address the segregation by clearing members of individual customer accounts. In the view of the Committee, any acceptable segregation model must include record keeping requirements that would be sufficient to allow the CCP to more readily allocate positions and collateral relating to a customer of the clearing member from the clearing member's own assets and those of other customers. In addition, the Committee clearly states that any acceptable segregation model cannot allow non-defaulting customer collateral to be used to support defaulting customer positions. Balancing these concerns with the additional costs of requiring full physical segregation, the Committee concludes that the most appropriate segregation model for CCPs operating in Canada is the "Complete Legal Segregation Model". Under this model, clearing members will be permitted to hold all customer collateral in an omnibus account, but all collateral must be recorded and attributed by both the CCP and the clearing member to each customer based on its collateral advanced. Initial margin would be paid and collected on a gross per customer basis. The clearing member would be able to post to the CCP the total required customer margin from the omnibus account, without regard to the customer to whom the collateral belongs. However, each clearing member would be required to report daily to the CCP the rights and obligations attributed to each customer. In the event of a clearing member default, each non-defaulting customer would be protected from losses on the positions of other customers, although all customers would bear some risk of loss resulting from the investment of the collateral in the customer pool. To minimize this risk, the Committee recommends that CCPs and clearing members only be able to invest customer collateral in instruments with minimal credit, market and liquidity risk. In addition, under the "Complete Legal Segregation Model", the CCP would be permitted to access the collateral of defaulting customers up to the value equal to the margin required to be posted by such customers, but would not have access to the collateral posted by non-defaulting customers.

To create further safeguards for posted collateral, the Committee suggests that CCPs should hold the collateral posted in their favour at one or more supervised and regulated entities that have robust accounting practices, safekeeping procedures and internal controls. The Committee further recommends that all CCPs that operate in Canada should be required to publicly disclose their segregation and portability arrangements so that customers can evaluate the level of customer protection provided. The Committee is also considering whether Canadian customer collateral accounts should be required to be governed by Canadian laws. With respect to uncleared OTC derivative trades, the Committee suggests that the parties should be free to negotiate the level of segregation required for collateral. It is considering whether OTC derivatives dealers should be required to offer arrangements for collateral to be held with a third-party custodian for uncleared transactions.


The Committee recognizes that any arrangement regarding the segregation and portability of collateral is affected by personal property security, securities transfer and bankruptcy and insolvency laws. In particular, the Committee focuses on the issue of perfecting a security interest in cash collateral under Canadian law and suggests that provincial laws may need to be amended to create a perfection by control regime for cash collateral. We would applaud these amendments, as the current state of the law makes it difficult to properly perfect a security interest in cash. For this reason, together with the end-user derivative rules that apply to all mutual funds, we have strongly recommended that our mutual fund clients do not post cash as collateral. The Committee's recommendation in this regard should help to address this issue. Please see our earlier client alert, entitled ISDA Releases Key Provisions to the Standard Credit Support Annex Proposal, for some additional commentary in this connection.


The application of bankruptcy and insolvency laws, whether as a result of a stay of proceedings or a temporary prohibition on dealing with the assets of an insolvent clearing member, would interfere with portability of customer collateral. The Committee suggests that any CCP operating in Canada would need to provide an analysis of all laws applicable to customer collateral in each jurisdiction of operation, including bankruptcy and insolvency laws, with a view to ensuring that the CCP's ability to expeditiously facilitate the termination of customer clearing member relationships, port positions or enforce collateral relationships are not compromised by applicable bankruptcy and insolvency laws. We would suggest that this will require a comprehensive review of the bankruptcy regime that applies to securities dealers in Canada, as we do not believe that our current regime is consistent with the Committee's desire for portability. The Committee has asked a number of specific questions and is soliciting public comments by April 10, 2012 on Consultation Paper 91-404. Following this consultation period, the Committee will finalize rule making guidelines and each province will begin the rule making process.

About BLG

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions