Canada: Mandatory Central Counterparty Clearing Of OTC Derivatives In Canada

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.

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
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