Canada: The Final Version Of Guideline E-22 — Margin Requirements For Non-Centrally Cleared Derivatives — What's New?

Last Updated: March 22 2016
Article by Stephen J. Redican and Arthur Nahas

Most Read Contributor in Canada, September 2016

On February 29, 2016, the Office of the Superintendent of Financial Institutions (OSFI) published the final version of Guideline E-22 — Margin Requirements for Non-Centrally Cleared Derivatives. The purpose of the Guideline is to provide clear and comprehensive guidance to all federally-regulated financial institutions1 (FRFIs) on the variation and initial margin requirements that will take effect starting September 1, 2016, consistent with the timing required by the Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO) framework.

This final version of the Guideline is the result of a public consultation that commenced with the issuance of a draft Guideline on October 19, 2015. The final Guideline incorporates several revisions resulting from comments received by OSFI during this period. Consistent with the draft Guideline, the final form of the Guideline requires the exchange of margin to secure the performance of non-centrally cleared derivatives (NCCD) transactions, which are derivative transactions that are not cleared through a central counterparty, between Covered Entities (as defined in the Guideline). This final Guideline is available here.

As recognized by OSFI in its Guideline Impact Analysis Statement, NCCDs contribute significantly to systemic risk in the financial sector. By requiring that collateral be available to offset losses caused by the default of a derivatives counterparty, margin can mitigate this systemic risk and offer heightened protection against counterparty credit risk. In addition, OSFI expects that implementing margin requirements will promote central clearing of derivatives where practicable.


In September 2013, the BCBS and IOSCO released an initial draft of a framework setting out the minimum standards for margin requirements for NCCDs. Canada, as a member of BCBS, participated in the development of this framework. Revised in March 2015, this framework now requires the mandatory exchange of initial and variation margin for NCCDs beginning on September 1, 2016.

By and large, the final version of the Guideline does not differ substantially from the draft published in October 2015. However, OSFI has incorporated certain revisions to the Guideline as a result of comments made during the consultation period in order to clarify, expand upon, or change certain provisions of the Guideline.

One of the questions raised by OSFI at the outset of the public consultation period last October was how margin requirements should be regulated in the context of NCCD transactions in Canada. OSFI sought feedback on whether it should opt to create its own guideline that would provide domestic margin requirements or alternatively whether it should rely on the BCBS/IOSCO framework to communicate these requirements. In line with its stated preference for the former approach in the draft Guideline, OSFI has concluded, with the release of the final Guideline, that a comprehensive domestic margin requirements guideline is the most appropriate option for ensuring that institutions understand and apply the guidance correctly.

Consistent with the draft Guideline, this final Guideline is based on the BCBS/IOSCO framework. According to OSFI, the Guideline is both consistent with the provisions of the BCBS/IOSCO framework, and supports the BCBS' financial stability objectives, while "giving due recognition to the constraints imposed by Canada's place in the global market." Given the cross-border nature of the derivatives market, OSFI notes that the Guideline may also support "equivalency or comparability assessments of Canadian derivatives regulatory requirements by other jurisdictions."

The Requirements

Who is Covered?

The Guideline applies to all FRFIs and their Covered Counterparties, i.e. non-FRFI counterparties that meet the definition of a Covered Entity. A Covered Entity is defined in the Guideline as a financial entity belonging to a consolidated group whose aggregate month-end average notional amount of non-centrally cleared derivatives for March, April, and May of 2016 and any year thereafter exceeds $12 billion. Prior to entering into a transaction, FRFIs are expected to self-declare themselves as Covered Entities (assuming they meet the requirements) and are responsible for confirming whether their counterparties are Covered Entities as well.

In contrast to the draft Guideline, non-financial entities are excluded altogether from the definition of Covered Entity in the final Guideline. As stated by OSFI, this exclusion was accepted after several commenters argued that non-financial entities are typically end users who use derivatives solely for hedging purposes and are excluded from the definition of a Covered Entity in the margin rules of most foreign jurisdictions.

Certain financial entities remain excluded from the definition of a Covered Entity. OSFI has provided an exemption to small and medium-sized financial entities (i.e. entities who do not belong to a consolidated group and whose notional amount of non-centrally cleared derivatives for a year does not exceed $12 billion) that would only face a low degree of risk in virtue of their non-material exposure to NCCDs. Significantly, in this connection OSFI has provided that investment funds that are managed by an investment advisor are considered distinct entities that are treated separately when applying the monetary threshold for determining whether it is a Covered Entity as long as the funds are distinct legal entities that are not collateralised by or are otherwise guaranteed or supported by other investment funds or the investment advisor in the event of fund insolvency or bankruptcy.

However, the final Guideline also expands the list of entities which are excluded from the definition of Covered Entity. This list now includes : (i) sovereigns, (ii) public sector entities,2 (iii) multilateral development banks eligible for a zero risk weight in the Capital Adequacy Requirements (CAR) Guideline, (iv) the Bank for International Settlements, (v) central counterparties, (vi) treasury affiliates that undertake risk management activities on behalf of affiliates within a corporate group, (vii) any special purpose entity (SPE) established for the purpose of financing a specific pool or pools of assets or underwriting a specific set of risk exposures, in each case, by incurring indebtedness (provided that the indebtedness of the SPE, including obligations owing to the SPE's swap counterparties, is secured by the specific pool or pools of financed assets), (viii) any SPE established by an investment fund for the purpose of acquiring and holding real estate or other physical assets on behalf of or at the direction of the investment fund, (ix) any SPE established for the purpose of acquiring or investing in real estate and (x) any collective investment vehicle established for the purpose of investing in real estate or other physical assets.

In addition, intra-group trades (i.e. non-centrally cleared derivatives between a Covered FRFI and its affiliates) and trades with certain specified multilateral development banks such as the European Investment Bank (EIB), the Asian Development Bank (ADB), the African Development Bank (AfDB) and International Finance Corporation (IFC), among others, are explicitly stated to exempt from the margin requirements.

After several commenters requested that OSFI provide further deference to foreign rules when FRFIs trade with foreign counterparties, OSFI established in the final Guideline a process for achieving substituted compliance for foreign rules.

In this connection, to avoid duplicative or conflicting margin requirements on a single set of transactions, the Guideline provides rules that will allow a foreign bank branch or foreign insurance company operating in Canada that is a Covered Entity as well as a Covered FRFI trading with a foreign Covered Counterparty to be deemed in compliance with OSFI's margin requirements if certain requirements are met.

OSFI has also addressed situations where the FRFI and the counterparty are located in different jurisdictions and has provided rules for determining when a counterparty's home jurisdiction can be deferred to for the purposes of determining whether the counterparty is a Covered Entity.

What Type of Transactions are Covered?

In general, the margin requirements outlined in the Guideline apply to all NCCDs with the exception of physically settled foreign exchange (FX) forwards and FX swaps. However, NCCDs between a FRFI that is a Covered Entity and its affiliates (i.e. intra-group trades) are not subject to the margin requirements of the Guideline.

What type of Collateral is Permitted?

The following types of collateral are eligible to satisfy both variation and initial margin requirements: (a) cash (in the form of money credited to an account or similar claims for the repayment of money, such as certificates of deposit or comparable instruments issued by a Covered Entity); (b) gold; (c) debt securities rated by a rating agency that meet certain defined threshold rating levels; (d) debt securities not rated by a rating agency if they are issued by a bank, listed on a recognized exchange, classified as senior debt, all rated issues of the same seniority by the issuing bank meet certain defined threshold rating levels and the institution holding the securities as collateral has no information to suggest that the issue justifies a rating below such rating; (e) equities (including convertible bonds) that are included in a main index; (f) equities (including convertible bonds) which are not included in a main index but which are listed on a recognized exchange; and (g) Undertakings for Collective Investments in Transferable Securities (UCITS) and mutual funds if a price for the units is publicly quoted daily and the UCITS/mutual fund is limited to investing in the instruments listed above. Securities issues by the posting counterparty are not eligible collateral.

Any margin exchanged must be subject to a haircut to account for potential changes in the value of the collateral. Haircuts may be computed using an internal model if the internal model meets the requirements set out in the Guideline.

Margin not subject to the additional haircut includes cash variation margin and initial margin exchanged in a currency other than the termination currency that the posting party has designated in the relevant contract when the currency of the asset differs from the currency of collateral and non-cash variation margin other than the type described below.

In contrast, margins subject to the additional haircut include all other initial margin other than the type described above and non-cash variation margin exchanged in a currency other than the ones agreed in the relevant contract are subject to the additional haircut when the currency of the asset differs from the currency of the collateral. How the haircuts are calculated is described in detail in the Guideline.

How is Margin Posted?

Collateral must be posted for both variation margin and initial margin. The Guideline contains a number of requirements in this connection, including the required amount to be exchanged, how and when margin should be calculated and called as well as the manner in which margin should be exchanged. F or both variation margin and initial margin, parties must have "rigorous and robust" dispute resolution procedures in place with their counterparty before entering into a NCCD transaction.

For initial margin requirements, the required amount may be calculated by reference either to (i) an internal quantitative portfolio margin model; or (ii) a standardized margin schedule. The specific method and parameters used by each party must be agreed upon prior to a transaction, and this choice must be consistent for all transactions within the same asset class, unless a counterparty otherwise requires. Moreover, a party may only use the internal model if it meets certain criteria set out by OSFI in the Guideline, such as the establishment of internal governance and validation processes, modeling and documentation requirements, and mandatory periodic reviews and escalation procedures.

OSFI took into account commenters' concerns regarding the practical achievability of having to calculate and call the first initial margin on a daily basis by allowing for the first initial margin call to occur within two business days of the execution of the trade and on a daily basis thereafter.

With respect to variation margin, OSFI has stated that the full amount necessary to fully collateralize the mark-to-market exposure of the NCCDs must be exchanged, subject to the minimum transfer amount for all margin transfers (which is not to exceed $750,000). In addition, to reduce adverse liquidity shocks and in order to effectively mitigate counterparty credit risk, OSFI has required that variation margin should be calculated and exchanged for NCCDs subject to a single, legally enforceable netting agreement, which would include an ISDA Master Agreement. At the request of commenters, who requested clarification on how to deal with "non-netting" counterparties where bankruptcy regimes or legal systems may make the enforceability of netting agreements difficult to verify, OSFI provided conditions for a netting agreement to be deemed legally enforceable. When a Covered FRFI enters into a netting agreement with a Covered Entity that is not legally enforceable, Covered FRFIs must collect variation margin amounts on a gross basis.

The amount of initial margin and variation margin required must be calculated and called within two business days of the execution of a trade, and thereafter on a daily basis, and it must be exchanged (posted/received) on or before the second business day following each call for initial margin or variation margin, as applicable.

When are the Requirements in Effect?

The requirement to exchange variation margin will be phased-in for certain FRFIs from September 1, 2016 to February 28, 2017. On a permanent basis thereafter, all Covered FRFIs will be subject to the requirements when transacting with another Covered Entity.

The requirement to exchange two-way initial margin with a threshold of up to $75 million will be phased-in from September 1, 2016 to August 31, 2020. On a permanent basis thereafter, all Covered FRFIs (subject to certain exceptions) will be subject to the initial margin requirements when transacting with another Covered Entity.

Initial margin and variation margin requirements will apply to all new contracts entered into during the phase-in periods. In this connection, genuine amendments to existing derivatives contracts as well as novations of grandfathered trades and "new" non-centrally cleared derivatives that result from portfolio compression of grandfathered trades will not qualify as new derivatives contracts. However, OSFI has stated that any amendment that is intended to extend an existing derivatives contract for the purpose of avoiding margin requirements, as well as new non-centrally cleared transactions resulting from compressions of both grandfathered transactions and transactions which are subject to mandatory margin requirements will be considered new derivatives contracts and will be subject to the margin requirements of this Guideline. Applying the initial margin and variation margin requirements to existing derivatives contracts is not required. Of course, a Covered FRFI may choose to do so as long as this is bilaterally agreed upon with the counterparty. A Covered FRFI cannot alternate between applying the margin requirements to all NCCDs and only apply them to new NCCDs to reduce margin requirements. OSFI has stated that this choice should be made consistently over time on a counterparty by counterparty basis.


1 For the purposes of the Guideline, federally-regulated financial institution refers to banks, foreign bank branches, bank holding companies, trust and loan companies, cooperative credit associations, cooperative retail associations, life insurance companies, property and casualty insurance companies and insurance holding companies.

2 Public sector entities are defined as (i) entities directly or wholly-owned by a government, (ii) school boards, hospitals, universities and social service programs that receive regular government financial support and (iii) municipalities.

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
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.