Canada: Change At The Margins: CSA Publishes Consultation Paper On Margin Requirements For Non-Centrally Cleared Derivatives

Last Updated: August 3 2016
Article by Shahen A. Mirakian

Co-author: Brent Thomas, Student-At-Law

On July 7, 2016, the Canadian Securities Administrators ("CSA") Derivatives Committee ("Committee") released CSA Consultation Paper 95-401 – Margin and Collateral Requirements for Non-Centrally Cleared Derivatives ("Consultation Paper"). The Consultation Paper is the Committee's initial step in the development of regulations for minimum margin requirements for non-centrally cleared derivatives in Canada.

The Consultation Paper's proposals ("Proposals") are intended to be largely harmonized with the Office of the Superintendent of Financial Institutions Guideline E-22: Margin Requirements for Non-Centrally Cleared Derivatives ("OSFI Guideline") (our summary of which can be found here). Although the Proposals are intended to be largely consistent with the rules of the OSFI Guideline, there are some distinct differences (discussed below).

Like the OSFI Guideline, the intent of the Committee's proposed framework is to reduce counterparty and systemic risk, and to encourage central clearing of derivatives by requiring Covered Entities (as defined below) to exchange initial and variation margin on non-centrally cleared derivatives transactions.

The Proposals are subject to thresholds that limit their application to smaller derivatives market participants, and also incorporate flexible regulations pertaining to the calculation of margin and a progressive phase-in period, which are intended to mitigate the potential costs and operational burdens of the margin requirements on smaller entities.

This bulletin discusses the implementation, scope and requirements contemplated by the Consultation Paper. The public is invited to make written submissions on the Proposals up until September 6, 2016.

Scope of Derivatives

Subject to some exclusions, the margin requirements of the Proposals apply to all non-centrally cleared over-the-counter derivatives.

Physically settled foreign exchange ("FX") futures and swaps will be excluded from the application of initial margin requirements, but will be subject to variation margin requirements. Only the interest rate component of fixed physically settled cross-currency swaps would be subject to the exchange of initial margin. And unlike the OSFI Guideline, variation margin requirements would still apply to all FX derivatives, including all components of cross-currency swaps.

Products excluded by local product determination rules will also be excluded from the proposed margin requirements. For example, in Ontario, derivatives prescribed not to be derivatives or excluded from being prescribed derivatives under Ontario Securities Commission Rule 91-506 Derivatives: Product Determination are excluded from both the initial and variation margin requirements.

Scope of Entities

The Proposals would apply, subject to the phase-in period, to financial entities whose aggregate month-end average notional amount outstanding in non-centrally cleared derivatives in March, April and May exceeds $12 billion ("Covered Entities"), and would be calculated on a corporate group basis, and exclude exempt intragroup transactions. The $12 billion threshold is consistent with the threshold for coverage under the OSFI Guideline following the completion of the OSFI Guideline's phase-in period. Whether an entity is a Covered Entity would be determined on an annual basis. Covered Entities who fall below the $12 billion threshold would not be subject to the Proposals for the subsequent year. The Proposals define "financial entity" to include cooperative credit associations, central cooperative credit societies, banks, loan corporations, loan companies, trust companies, trust corporations, insurance companies, treasury branches, credit unions, caisses populaires, financial services cooperatives, pension funds, investment funds, and any person or company that is subject to registration or exempted from registration under securities legislation of a jurisdiction of Canada, in any registration category, as a result of trading in derivatives.

The Consultation Paper states that the margin requirements are intended to be limited to local counterparties, but no definition is provided for the term. It is likely that the definition would be the same as that which is used in existing rules (though there is no harmonized definition among the various Canadian jurisdictions).

Substituted Compliance, Exemptions & Exclusions

Substituted compliance – Canadian regulations

Federally Regulated Financial Institutions ("FRFI") are Covered Entities under the Proposals, but FRFIs that are subject to and in compliance with the OSFI Guideline are exempt from the margin requirements. Covered Entities who transact in derivatives with FRFIs will still be subject to the Proposal's margin requirements, as both entities are Covered Entities.

The Committee may also consider providing comparable relief from the Proposal's margin requirements for Covered Entities that are subject to and in compliance with requirements of other Canadian regulators that are equivalent to the principles of the Proposals.

Substituted compliance – foreign regulations

Like FRFIs, foreign counterparties may also fall within the definition of Covered Entities, but given the international nature of the derivatives market, and the likelihood of regulatory overlap, the Proposals exempt some transactions involving foreign counterparties who are subject to and in compliance with rules imposed by a regulatory authority in the foreign counterparty's jurisdiction. Derivatives transactions involving a foreign counterparty in a jurisdiction that has regulations that are deemed to be equivalent will be exempt from the Proposal's margin requirements.

Interestingly, foreign branches and subsidiaries of Canadian entities dealing with foreign counterparties in jurisdictions that are not deemed to be equivalent will be subject to the Canadian bilateral margin regime. This is a significant proposed expansion of the jurisdiction of Canadian securities regulators.

Intragroup exemption

The Proposals exempt certain intragroup derivatives transactions from the margin requirements. Affiliated Covered Entities who wish to rely on this exemption would be required to meet the relationship requirements set out in the proposed mandatory central clearing regime;

a) both affiliated entities are prudentially supervised on a consolidated basis; or

b) financial statements for both affiliated entities are prepared on a consolidated basis.

Government and public sector exclusion

The Proposals exclude derivatives transactions involving government or public sector entities that represent zero credit risk to their counterparties. This exclusion would apply to derivatives involving the Bank of International Settlements, the International Monetary Fund, and certain government entities, including central banks, certain crown corporations and entities wholly owned by Canadian federal or provincial governments or governments of a foreign jurisdiction.

Margin Requirements

Initial margin

The requirement to exchange initial margin would only apply where both counterparties are Covered Entities. The exchange of initial margin would also be subject to a minimum threshold of $75 million of initial margin required for all outstanding transactions.

Whether the $75 million threshold has been reached would be determined on a consolidated group basis, by aggregating the total exposure of all affiliated entities. Subject to a Minimum Transfer Threshold (as defined below), if the amount of initial margin that a Covered Entity owes exceeds $75 million, it would only be required to deliver the amount that exceeds $75 million. The Minimum Transfer Threshold stipulates that Covered Entities are only required to deliver collateral if the amount owed exceeds $750,000 ("Minimum Transfer Threshold"). Counterparties will be permitted to agree to lower Minimum Transfer Thresholds. The Minimum Transfer Threshold would apply to the sum of amounts owed for both initial and variation margin. Where the amount of margin a Covered Entity is required to deliver exceeds $750,000, it will be required to deliver that full amount. Both the $75 million threshold, and the Minimum Transfer Threshold are identical to the OSFI Guideline's requirements.

The Proposals would require initial margin to be calculated and called within two business days following a trade, and that collateral be delivered within two business days of initial margin being called, which is consistent with the OSFI Guideline. Covered Entities will retain some flexibility in determining how to calculate initial margin under the Proposals. Covered Entities would be permitted to calculate initial margin based on a standardized schedule prescribed by the CSA, or by using an internal quantitative margining model. Covered Entities would be allowed to use the standardized schedule and an internal model for different classes of derivatives. To prevent "cherry-picking" to achieve favourable margin outcomes, Covered Entities would be required to consistently apply the same calculation method for each class of derivatives. Internal models would have to be recalibrated and reviewed on a yearly basis.

Variation margin

Where the counterparty is also a Covered Entity, the Proposals would require all Covered Entities to deliver variation margin that fully collateralizes the mark-to-market (or mark-to-model for illiquid derivatives) exposure of the derivative transactions, subject to the Minimum Transfer Threshold.

The Proposals would require that variation margin be calculated and called on a net basis within two business days after the execution of a transaction, and recalculated and called daily thereafter. Variation margin would need to be delivered within two business days from the day it was called, which is consistent with the OSFI Guideline. Where timely and reliable data is readily available to value a derivative, Covered Entities would be required to use the mark-to-market method for calculating variation margin. Where reliable and timely information is not available to value a derivative, Covered Entities would be permitted to use an alternative method. Any such alternative method would have to be recalibrated and reviewed annually.

Eligible Collateral

The list of eligible collateral is similar, but not entirely consistent with the eligible collateral under the OSFI Guideline (which also includes debt securities issued by certain public sector entities).

A non-exhaustive list of assets that may be used as collateral is set out in the Proposals, and includes:

a) cash;

b) gold;

c) debt securities issued or guaranteed by the Government of Canada, Bank of Canada or provincial and territorial governments;

d) securities issued by and fully guaranteed by the Bank for International Settlements, the International Monetary Fund, or a multilateral development bank with a rating of at least BB-;

e) corporate debt securities with a rating of at least BBB-;

f) debt securities issued by foreign governments with a rating of at least BB-;

g) equities included on major Canadian stock indices; and

h) mutual funds, provided the unit price is publicly quoted on a daily basis, and the fund is limited to investing in the foregoing instruments.

Additionally, Covered Entities receiving collateral will be required to apply an appropriate haircut to account for potential changes in the value of the collateral. As with the calculation of initial margin, haircuts may be calculated based on a standardized schedule, or an internal quantitative haircut model. Covered Entities that use an internal model would be required to recalculate collateral haircuts every three months, and to have their models certified by an independent auditor prior to use.

Treatment of Collateral & Re-hypothecation

The Proposals would require that collateral received as initial margin be segregated from the assets of the receiving entity. A receiving Covered Entity would be permitted to comingle collateral that it has received from various counterparties to different derivative transactions. The Committee also proposes to require collateral-receiving entities to provide the posting counterparty with the option to have the collateral held by a third party custodian.

Unlike the OSFI Guideline, the Proposals permit very limited re-hypothecation of collateral received for initial margin. Re-hypothecation would be permitted to facilitate a back-to-back hedge of the derivatives position of the posting Covered Entity. Received collateral could be re-hypothecated only once. Covered entities that re-hypothecate collateral would be required to inform the next Covered Entity receiving the re-hypothecated collateral that it has been re-hypothecated, and that it cannot be further re-hypothecated.

There is no specific discussion of re-hypothecation of collateral received as variation margin. The general understanding is that such re-hypothecation would be permitted.

Phase In Period

The requirement to exchange initial and variation margin will be phased in gradually, similar to the phase-in period of the OSFI Guideline. However, because the Proposals are not likely to be completed this year, the Committee plans to propose a phase-in timeline adapted to the Basel Committee on Banking Supervision and the International Organization for Securities Commission standards, sometime in the future.

Next Steps and Comments

CSA has invited industry to submit written comments on the Proposals by September 6, 2016, and has specifically requested comments on 16 questions published in the Proposals. The comments will be taken into consideration when drafting the forthcoming National Instrument.

We invite market participants to discuss their questions and concerns with us and are available to assist those wishing to submit comments.

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.

Shahen A. Mirakian
Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
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
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