On June 20, 2012, the Canadian Securities Administrators (CSA)
published the latest in a series of over-the-counter derivatives
consultation papers. Comments on the consultation paper are being
accepted until September 21, 2012.
The main recommendation is that the CSA take the necessary steps
to make central counterparty clearing (CCP clearing) mandatory for
eligible over-the-counter derivatives (OTC Derivatives). In a
central counterparty (CCP) model, after a trade is executed, either
directly between two counterparties or on an exchange or electronic
trading platform, the CCP becomes the counterparty to each of the
The paper details proposals on:
the process for determining which OTC derivatives are eligible
for mandatory CCP clearing;
the recognition, regulation and governance of CCPs;
clearing member access; and
Eligibility for Mandatory CCP Clearing
The paper recommends that CCPs make recommendations to
regulators about which OTC derivatives should be regulated. Since
not every OTC derivative will be suitable for CCP treatment, the
paper sets out the factors that a market regulator should consider,
such as whether the contract is sufficiently standardized to be
cleared through a CCP, whether the underlying instruments or
markets for the underlying instruments provide adequate pricing
information, whether there is sufficient liquidity in the contract
and whether the contract would bring undue risk into a CCP.
Recognition, Regulation and Governance of CCPs
In keeping with current approaches to the recognition of
self-regulatory organizations in the securities domain, the paper
proposes that market regulators provide for the recognition and
regulation of CCPs and the exemption from recognition of CCPs, and
that market regulators have the ability to apply terms and
conditions to the recognition or exemption from recognition of a
CCP, to approve or reject the CCP's rules and procedures, to
apply terms and conditions to such rules, including its risk
management model, to receive and review regular CCP filings,
including the CCP's financial statements, and to conduct
regular and ad hoc inspections. This recognition obligation would
apply not only to local CCPs, but also to CCPs from outside a CSA
jurisdiction that wish to exercise clearing activity with an entity
from a CSA jurisdiction. Legislation for the recognition of
clearing agencies is already in force in Québec, Ontario and
CCPs would be expected to implement governance structures to
provide that board members be independent of CCP management
persons, persons that have a material ownership interests in the
CCP and clearing members of the CCP.
Clearing Member Access
The paper proposes the adoption of regulations that require CCPs
to develop access policies that facilitate fair and open access and
that do not unreasonably prohibit or limit access to services
regardless of how the derivatives transaction is executed. The
access requirements established by a CCP or services offered by a
CCP should not create a competitive advantage for any trading
The paper proposes that regulations be developed to require that
a CCP create and implement a robust risk management program, in
accordance with international best practices. These programs should
be fully transparent to regulators, clearing members and other
relevant stakeholders. The Committee proposes that the regulations
set out specific requirements, including that a CCP:
conduct a full analysis of all relevant risks and have in place
appropriate risk management procedures;
impose transparent risk limits on individual clearing members,
requiring that the member inform its regulator or regulators when a
clearing member is at risk of default and when any default
procedures are triggered;
undertake and report to regulators on the results of regular
stress testing of the adequacy of the CCP's financial
maintain and utilize accurate pricing and valuation
maintain and utilize product approval procedures to ensure that
new clearing products do not bring undue risk to the CCP and its
have a chief risk officer who reports to the CCP's board of
directors or risk committee, as appropriate.
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