Canada: Regulation Of Derivatives – An Update

In our previous articles on the Regulation of Credit Default Swaps, published on September 26, 2008 and November 28, 2008, we described how regulators in the United States and Canada were addressing the issues of systemic risk and the instability of the financial system attributed to credit default swaps in the aftermath of the financial credit crisis that started in the summer of 2007. While there are many areas in which regulation is seen to be necessary, the largely unregulated privately negotiated over-the-counter (OTC) derivatives market , which includes credit default swaps, is receiving the most attention.

On May 13, 2009, Secretary of the US Treasury Timothy F. Geithner sent a letter to US congressional leaders outlining proposed amendments to the Commodity Exchange Act (CEA), securities laws and other relevant laws that Secretary Geithner believes are needed to enable the US government to effectively regulate the OTC derivatives markets. This update summarizes and briefly comments upon the framework proposed by Secretary Geithner. It also reports on stakeholder reactions to Secretary Geither's proposals.

Objectives of Regulation

The US Treasury Department outlined four main objectives to be achieved by government regulation of the OTC derivatives markets and discussed the related steps to be taken:

1. Preventing activities in OTC derivatives markets from posing risk to the financial system by :

  1. amending the CEA and securities laws to require clearing of all standardized OTC derivatives through regulated central counterparties (CCPs);
  2. ensuring that CCPs impose robust margin requirements and other necessary risk controls; and
  3. ensuring that non-standardized OTC derivatives are not used solely as a means to avoid using a CCP.

2. Promoting the efficiency and transparency of OTC derivatives markets by:

  1. imposing a "robust and appropriate regime of prudential supervision and regulation" on dealers and firms whose activities in the OTC derivatives markets create large exposures to counterparties, including the establishment of conservative capital requirements, business conduct standards, reporting requirements, and conservative requirements relating to initial margins on counterparty credit exposures;
  2. amending the CEA and securities laws to authorize the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) to impose recordkeeping and timely reporting requirements on all OTC derivatives transacted, including requiring clearing of standardized derivatives transactions through a regulated CCP and reporting of customized, non-standardized transactions to a regulated trade repository; and
  3. requiring CCPs and trade repositories, such as regulated exchanges and regulated transparent electronic trade execution systems for OTC derivatives, to ― among other things ― make aggregate data on open positions and trading volumes available to the public, and to make data on any individual counterparty's trades and positions available on a confidential basis to the CFTC, the SEC and the institution's primary regulators.

3. Preventing market manipulation, fraud and other market abuses by:

  1. ensuring that the CFTC and SEC have clear, unimpeded authority to police fraud, market manipulation and other market abuses involving all OTC derivatives;
  2. ensuring that the CFTC has authority to set position limits on OTC derivatives that perform or affect a significant price discovery function with respect to regulated markets; and
  3. requiring CCPs, trade repositories and other market participants to provide the CFTC, SEC and other regulators with a complete picture of activity in the OTC derivatives market in order to assist regulators in detecting and deterring market abuses.

4. Ensuring that OTC derivatives are not marketed inappropriately to unsophisticated parties by:

  1. amending the CEA and securities laws to tighten the limits on the types of counterparties that could participate in OTC derivatives markets; and
  2. amending the CEA and securities laws to impose additional disclosure requirements or standards of care with respect to the marketing of derivatives.


Although US politicians appear to be moving toward establishing a framework for regulation of OTC derivatives, there are still many unanswered questions. One is how a "standardized" OTC derivative will be defined (and who will make that determination). There is a concern that if there is an exclusion from central clearing for non-standardized products, systemic risks will not be properly contained, as, arguably, the higher-risk products often take the form of customized OTC derivatives. However, as mentioned above, those customized transactions would be subject to a "robust and appropriate regime of prudential supervision and regulation," which may be sufficient to address the increased risks. Another unanswered question deals with the practicalities of regulating the OTC derivatives market. While Secretary Geithner's letter contemplates multiple regulators, others are calling for a single regulator. It appears likely that oversight of OTC derivatives could be split between the SEC and the CFTC.

It should be noted that the proposed framework would treat all OTC derivatives the same. However, there are a multitude of different types of derivatives. The differences are not only based on the underlying asset (i.e., credit, equity, foreign exchange, interest rate, commodities, etc.) but also within each asset type, one can have different structures (i.e., swap, forward, basket swaps, basket forwards, total return, options, etc.). Therefore, drafting regulations that cover all the different types of derivative transactions will be a challenging task.


As discussed in our previous two articles, Alberta, British Columbia and Québec have adopted rules and legislation regulating OTC derivatives. Ontario is still considering its proposed Rule 91-504 dealing with OTC derivatives. However, none of the Canadian provinces have rules in place, nor has any province publicly announced that it is considering rules, which require centralized clearing of OTC derivatives. Furthermore, none of those rules or legislation deals with the extensive recordkeeping and reporting requirements that are being proposed by the US Treasury Department.


Many commentators point to the largely unregulated OTC derivatives market, in particular, credit default swaps, as being the catalyst for the current global credit problems. Whether one agrees or disagrees with that view, it appears that all interested parties would welcome the regulation of OTC derivatives on some level. The Washington Post reported that Secretary Geithner's letter was warmly received by House Democrats who share oversight of this issue. Even the International Swaps and Derivatives Association, the global trade association that represents participants in the privately negotiated derivatives market, acknowledged that the proposal was "an important step toward much-needed reform of financial industry regulation." However, the 'devil is in the details,' and it remains to be seen whether the proposed framework will be effective in minimizing systemic risk, and whether Canadian provinces will use the US regulatory framework as a model for OTC derivatives regulation in Canada. One can expect additional proposals and discussion in the weeks ahead.

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
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