Canada: Mandatory Central Counterparty Clearing Of OTC Derivatives In Canada

Last Updated: March 16 2015
Article by Laure Fouin, Candace Pallone and Sonia J. Struthers

Most Read Contributor in Canada, September 2018

The Canadian Securities Administrators (CSA) has proposed mandatory central counterparty clearing of certain standardized over-the-counter (OTC) derivative transactions consistent with its goal to improve transparency in the OTC derivatives market and enhance the overall mitigation of systemic risk.

On February 12, 2015, the CSA published for comments proposed National Instrument 94-101 – Mandatory Central Counterparty Clearing of Derivatives (Clearing Rule) and its proposedCompanion Policy 94-101CP(Clearing CP). Comments in writing are welcome until May 13, 2015.

Coming into force using a phase-in approach, the Clearing CP and Clearing Rule (together, Proposed Instrument) would (i) first apply to clearing members of a regulated clearing agency1 providing clearing for the mandatory clearable derivative; (ii) six months later apply to financial entities (as defined) above a specified threshold that remains to be determined; (iii) six months later apply to all other financial entities; and (iv) finally, six months later apply to all counterparties. In effect, non-financial entities would benefit from an 18-month grace period after the requirement to mandatorily clear trades applies to clearing members.

The Proposed Instrument has two parts: (i) circumscribing the circumstances under which counterparties to an OTC derivatives transaction are subject to mandatory central clearing or exempted, and (ii) circumscribing the types of derivatives that are subject to mandatory central counterparty clearing.

Mandatory Central Counterparty Clearing

Under the Clearing Rule, a "local counterparty," which is an entity, or the affiliate of such an entity that is responsible for the liabilities of this entity, that is organized under the laws of the jurisdiction of Canada or that has its head office or principal place of business in such a jurisdiction must submit for clearing a transaction that consists of entering into, materially amending, assigning, acquiring or disposing of a derivative2 that has been determined to be a mandatory clearable derivative.

When a transaction has already been submitted for clearing under the laws of another jurisdiction of Canada, or under the laws of a designated foreign jurisdiction, substituted compliance may be available. In addition, a local counterparty in certain jurisdictions may also be eligible for substituted compliance if the transaction is submitted for clearing to a clearing agency or a clearing house that is recognized or exempted from recognition under the securities legislation of another jurisdiction of Canada.

Exemptions to Mandatory Central Counterparty Clearing

Two exemptions to the clearing requirement are provided in the Clearing Rule: the end-user exemption and the intragroup exemption.

The proposed end-user exemption would apply when at least one of the counterparties is not a financial entity and that counterparty is entering into the transaction to hedge or mitigate its commercial risk or that of an affiliate.

A financial entity for the purpose of the Proposed Instrument is a cooperative, bank, loan corporation, loan company, trust company, trust corporation, insurance company, treasury branch, credit union, caisse populaire, financial services cooperative or league, pension fund, investment fund or any person that is subject to registration requirements, registered or exempted from registration requirement or a person organized under the laws of a foreign jurisdiction that is similar to such an entity.

The Clearing Rule provides a definition of the terms "hedging or mitigating commercial risk": at the time of the transaction, establishing a position that is intended to reduce risks relating to the commercial activity or treasury financing activity of the counterparty or an affiliated entity of the counterparty and either (i) the transaction covers risk from the change in the value, price, rate or level of assets, services, inputs, products, commodities or liabilities that the counterparty or an affiliated entity of the counterparty owns, produces, manufactures, processes, provides, purchases, merchandises, leases, sells or incurs or reasonably anticipates owning, producing, manufacturing, processing, providing, purchasing, merchandising, leasing, selling or incurring in the normal course of its business or (ii) covers the risk arising from the indirect impact on an asset or a liability of the counterparty or its affiliates resulting from fluctuation of one or more interest rates, inflation rates, foreign exchange rates or credit risk. In some cases macro, proxy or portfolio hedging may benefit from the exemption. The relevant strategy or program should then be documented and, where reasonable, subject to regular compliance audits to ensure it continues to be used for relevant hedging purposes.

The end-user exemption applies without the need to submit any document to the applicable regulator. However, a counterparty relying on this exemption should retain appropriate records demonstrating the eligibility of the transaction, particularly to prove that it was entered into in order to hedge or mitigate risks. For this purpose, according to the guidance given by the CSA in the Clearing CP, it is advisable to maintain records of the following information:

  • risk management objective and nature of risk being hedged,
  • date of hedging,
  • hedging instrument,
  • hedged item or risk,
  • how hedge effectiveness will be assessed, and
  • how hedge ineffectiveness will be measured and corrected as appropriate.

The proposed intragroup exemption would apply where affiliated entities that prepare consolidated financial statements, or counterparties prudentially supervised on a consolidated basis, enter into a transaction in a mandatory clearable derivative.

This exemption applies when both counterparties have agreed to rely on the exemption and the terms of the transaction have been set out in a written agreement. In addition, the transaction must be subject to centralized risk evaluation, measurement and control procedures.

A counterparty relying on the intragroup exemption must submit a form to the applicable regulator identifying the other counterparty and the basis for relying on the exemption.

The local counterparty may rely on its counterparty's factual representation to determine that an exemption is available. However, when doing so, the local counterparty remains responsible for determining whether, given the facts available, the exemption is available and should retain all documents that show it properly relied on the exemption.

Determination of Mandatory Clearable Derivatives

All regulated clearing agencies will be required to inform the relevant regulator of all OTC derivatives or classes of OTC derivatives for which it provides clearing services when the Clearing Rule comes into force, and, on an ongoing basis, within 10 days of agreeing to provide such clearing services.

After receiving such notification from a regulated clearing agency, each regulator will determine whether such cleared derivative or class of derivatives should be made a mandatory clearable derivative.

In assessing whether a derivative or class of derivatives should be a mandatory clearable derivative, the regulators will consider various factors, including its standardization, its risk profile and the liquidity and characteristics of its market. In addition, the CSA will attempt to make its determination in a harmonized manner across Canada and in accordance with international standards, in particular by consulting the relevant guidance from the OTC Derivatives Regulators Group, which is composed of representatives of OTC derivatives regulators in Australia, Brazil, Ontario, Quebec, the European Union, Hong Kong, Japan, Singapore, Switzerland and the United States.


1 For example, in Ontario, the clearing agencies either recognized or exempted from recognition by the Ontario Securities Commission are Canadian Depository for Securities Limited (CDS), Canadian Derivatives Clearing Corporation (CDCC), Chicago Mercantile Exchange Inc. (CME), CLS Bank International, CME Clearing Europe Limited, FundSERV Inc., ICE Clear Canada, Inc., ICE Clear Credit LLC, LCH.Clearnet Limited, LCH.Clearnet LLC, Omgeo Canada Matching Ltd., the Options Clearing Corporation and SS&C Technologies Canada Corp. In Quebec the clearing agencies either recognized or exempted from recognition by the Autorité des marchés financiers are CDCC, CME, CDS, ICE Clear Canada, Inc., LCH.Clearnet Limited, Natural Gas Exchange and The Options Clearing Corporation.

2 The novation of a mandatory clearable derivative, unless it results from submitting the derivative to a Regulated Clearing Agency, is also subject to mandatory clearing.

To view original article, please click here

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.

Similar Articles
Relevancy Powered by MondaqAI
Blake, Cassels & Graydon LLP
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Blake, Cassels & Graydon LLP
Related Articles
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
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

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