Canada: Time To Make It Clear: CSA Publishes Model Rule On Mandatory Central Counterparty Clearing Of OTC Derivatives

Last Updated: January 13 2014

Article by Shahen A. Mirakian and Money Khoromi, Student-at-Law

On December 19, 2013, the Canadian Securities Administrators Over-the-Counter Derivatives Committee ("CSA Committee") published CSA Staff Notice 91-303 Proposed Model Provincial Rule on Mandatory Central Counterparty Clearing of Derivatives ("Staff Notice 91-303"). Staff Notice 91-303 consists of the Proposed Model Provincial Rule on Mandatory Central Counterparty Clearing of Derivatives together with its explanatory guidance to the Central Counterparty Clearing Rule (the "Proposed Model Rule"). The Proposed Model Rule, which sets out requirements for central counterparty clearing of over-the-counter ("OTC") derivatives transactions, is aimed at increasing transparency and the overall mitigation of risk in the OTC derivatives market.

Simultaneously with the publication of the Proposed Model Rule, certain members of the CSA published draft Rule 24-503 Clearing Agency Requirements. This draft rule sets out application process requirements for recognition as a clearing agency or exemption from the recognition requirement, as well as ongoing requirements for recognized clearing agencies ("Draft Rule 24-503"). In addition, the CSA is expected to publish Provincial Model Rule 91-304, Derivatives Customer Clearing and Protection of Customer Positions and Collateral ("Model Rule 91-304") shortly. The Proposed Model Rule, Draft Rule 24-503, and the upcoming Model Rule 91-304 all relate to central counterparty clearing. The CSA Committee is, therefore, urging market participants to consider them comprehensively.


In 2009, the G20 nations agreed to a comprehensive set of reforms in response to concerns surrounding the systemic risks inherent in the OTC derivatives markets ("G-20 Commitments"), which were aimed at enhancing transparency, mitigating systemic risk, and protecting against market abuse. These reforms, which were supposed to be in place by the end of 2012, include the following requirements: (i) all standardized OTC derivatives contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties; (ii) all OTC derivatives contracts should be reported to trade repositories; and (iii) non-centrally cleared contracts should be subject to higher capital requirements and minimum margining requirements should be developed. In response to the G-20 Commitment relating to mandatory central clearing, the CSA Committee published Consultation Paper 91-406 Derivatives: OTC Central Counterparty Clearing (the "Central Clearing Consultation Paper") on June 20, 2012. The Proposed Model Rule reflects comments received by the CSA Committee on the Central Clearing Consultation Paper and international developments in this area.


Due to variations in provincial securities legislation in the area of OTC derivatives, a uniform regulatory scheme introduced by way of a national instrument is not possible. Instead, the CSA Committee uses "model rules" as a way to propose a new regulatory scheme which the individual provincial regulators use as a guideline for their respective province-specific rules. "Model rules" allow the CSA Committee to ensure that the substance of the rules will be the same across all jurisdictions, while allowing each jurisdiction the flexibility to implement legislative amendments, if required, and publish their province-specific rules for comment in accordance with their respective legislative requirements.


(a) Broadening the Application of Rule 91-506

Ontario Securities Commission ("OSC") Rule 91-506, Derivatives: Product Determination (the "Scope Rule"), which came into force on December 31, 2013, was first published with a narrowly defined scope. Section 1 of the Scope Rule limits its application to OSC Rule 91-507, Trade Repositories and Derivatives Data Reporting. However, the Proposed Model Rule broadens the application of the Scope Rule, making it applicable to the Proposed Model Rule. Based on this, it seems likely that the Scope Rule will apply to all new OTC derivatives related rules.

(b) When will a Derivative be Subject to Mandatory Clearing

  1. Bottom-Up Approach to Clearing

    The Proposed Model Rule uses a bottom-up approach for determining whether a derivative or class of derivatives will be subject to mandatory clearing. This approach requires a clearing agency to notify the securities regulator whenever it provides new clearing services for a derivative or class of derivatives. The information must be provided in electronic format on Form F2 attached to the Proposed Model Rule. Upon receiving notice from a clearing agency, the securities regulator will determine whether the derivative or class of derivatives will be subject to the clearing requirement.
  2. 60 Day Comment Period

    Upon receiving notice that a clearing agency is providing new clearing services for a derivative or class of derivatives, the securities regulator may provide a 60 day period to allow market participants to comment before the securities regulator determines whether that derivative or class of derivatives should be subject to mandatory clearing.
  3. Factors in Determining Whether a Derivative will be Subject to Mandatory Clearing

    The explanatory guidance sets out a non-exhaustive list of factors to be considered by a securities regulator in the course of determining whether a derivative will be subject to the clearing requirement. In determining whether a derivative or class of derivatives is to be subjected to the mandatory central counterparty clearing requirement, a regulator will consider:

    1. the level of standardization, such as the availability of electronic processing, the existence of master agreements, product definitions and short form confirmations;
    2. the effect of central clearing of the derivative on the mitigation of systemic risk, taking into account the size of the market for the derivative and the resources of the clearing agency available to clear the derivative;
    3. whether the derivative would bring undue risk to the clearing agency;
    4. the outstanding notional exposures, liquidity and reliable and timely pricing data;
    5. the existence of third party vendors providing pricing services;
    6. the existence of an appropriate rule framework, and the availability of capacity, operational expertise and resources, and credit support infrastructure to clear the derivative on terms that are consistent with the material terms and trading conventions on which the derivative is then traded;
    7. whether the clearing agency would be able to risk manage the additional derivatives that might be submitted due to the clearing requirement determination;
    8. the effect on competition, taking into account appropriate fees and charges applied to clearing, and if the proposed clearing requirement determination could harm competition;
    9. alternative derivatives or clearing services co-existing in the same market;
    10. the existence of a clearing obligation in other jurisdictions; and
    11. the public interest.

(c) The Clearing Requirement

A "local counterparty" is a person that, at the time of the transaction, meets either of the following criteria: (a) is a person organized under the laws of the local jurisdiction or has its head office or principal place of business in the local jurisdiction; and (b) is an affiliate of a person described in (a), where the person described in (a) is responsible for the affiliate's liabilities. A "clearable derivative" is defined as a derivative that the securities regulator determines to be subject to the clearing requirement.

A local counterparty to a transaction involving a clearable derivative has a duty to submit the transaction to a clearing agency for clearing by the end of the business day in which the transaction was executed. If the transaction is executed after the business hours of the clearing agency, the transaction must be submitted for clearing on the following business day.

(d) Substituted Compliance

This rule creates obvious overlapping international and interprovincial trade clearing requirements. In order to alleviate some of the redundancy, a narrow exemption has been provided (the "Substituted Compliance Exemption"). The Substituted Compliance Exemption is only available to a person who is a local counterparty under branch (b) of the definition. In order to rely on substituted compliance, the transaction must be submitted for clearing pursuant to the securities legislation of a Canadian province other than the home jurisdiction or the laws of a foreign jurisdiction listed in Appendix B to the Proposed Model Rule. It should be noted that Appendix B has been left blank at this time.

(e) Exemptions

Besides the Substituted Compliance Exemption, the Proposed Model Rule has two other exemptions from the mandatory derivative clearing requirement. The End-User Exemption and Intragroup Exemption are discussed individually below.

  1. End-User Exemption

    The End-User Exemption will excuse a counterparty from the requirement to submit a transaction for clearing if both of the following conditions are met: (i) one of the counterparties is not a financial entity, and (ii) that counterparty is entering into the transaction to hedge or mitigate commercial risk related to the operation of its business. The End-User Exemption can also be relied on by an affiliate of the counterparty where: (i) the affiliated entity is acting as agent on behalf of the counterparty, (ii) the transaction is a hedge or mitigates the commercial risk of the person or company, or other affiliate of the person or company, that is not a financial entity, and (iii) the affiliated entity is not subject to a registration requirement under the securities legislation of a jurisdiction of Canada.

    However, the availability of this exemption is limited by the broad definition of "financial entity" found in the Proposed Model Rule, which includes Canadian or foreign financial institutions, pension funds, investment funds, governmental finance agencies, and any person subject to a registration requirement under securities legislation whether such person is registered or exempt.

    The requirement that the transaction be entered into for the purposes of hedging or mitigating commercial risk related to the operation of the counterparty's business prevents reliance on the End-User Exemption where the transaction is entered into for a speculative purpose, or to offset or reduce the risk of another derivative transaction, unless that other transaction itself is held for the purpose of hedging or mitigating of commercial risk. Hedging is limited to transactions that establish a position which is intended to reduce risks relating to the commercial activity or treasury financing activity of the counterparty or of an affiliate and, alone or in combination with other derivatives directly or through closely correlated financial instruments, meets any of the following requirements: (i) the derivative covers the risks arising from the change in the value of asset, services, inputs, products, commodities or liabilities that the counterparty uses in the normal course of its business, and (ii) the derivative covers the risk arising from the indirect impact on the value of assets, services, inputs, products, commodities or liabilities referred to in subparagraph (i), resulting from fluctuation of interest rates, inflation rates, foreign exchange rates or credit risk.

    It should be noted that Consultation Paper 91-405 Derivatives: End User Exemption1 originally proposed a more onerous end-user exemption which included such requirements as: (i) obtaining approval by a party's board of directors (or equivalent) of a comprehensive derivatives strategy or business plan, (ii) reporting such board approval as part of such party's reporting to a trade repository, (iii) providing notice to the regulator regarding such party's intention to rely on the End-User exemption, and (iv) maintaining appropriate records of eligibility. The End-User Exemption found in the Proposed Model Rule does not contemplate these requirements.
  2. Intragroup Exemption

    An Intragroup transaction is a transaction between: (i) two affiliated entities with consolidated financial statements, or (ii) two counterparties prudentially supervised by a regulator on a consolidated basis. A counterparty to an Intragroup Transaction can rely on the Intragroup Exemption and avoid submitting a transaction for clearing if all of the following conditions apply: (i) both counterparties agree to rely on the Intragroup Exemption, (ii) the transaction is subject to appropriate centralized risk evaluation, measurement and control procedures, and (iii) where both counterparties are not dealers, there is written documentation setting out the terms of the transaction. The explanatory guidance states that each counterparty is entitled to structure its own risk evaluation, measurement and control procedures as long as it reasonably monitors and manages the risk associated with non-cleared derivatives.


The CSA Committee encourages market participants and the public to submit comment letters addressing any issues or questions raised by Staff Notice 91-303. Comments must be submitted by March 19, 2014. The CSA committee will consider the comments and finalize the rule-making guidelines, and each province will then begin the rule-making process. We expect that this rule will be finalized by mid 2014 and become effective in the fourth quarter of 2014.

We invite market participants to discuss any comments and questions with us. We are available to assist those wishing to submit comments to the CSA Committee regarding Staff Notice 91-303.


1. For a review of CSA Paper 91-405, please see McMillan LLP Derivatives Law Bulletin " can I be excused? Canadian regulators publish consultation paper on end-user exemptions in the OTC derivatives market" (April 2012).

The foregoing provides only an overview. Readers are cautioned against making any decisions based on this material alone. Rather, a qualified lawyer should be consulted.

© Copyright 2014 McMillan LLP

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
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
Check to state you have read and
agree to our Terms and Conditions

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.

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 by clicking here .

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.


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.