The Bank of Canada and the Canadian Securities Administrators (CSA) last week released a statement permitting Canadian market participants to clear OTC derivatives contracts through any CCPS, including global CCPs that are recognized or exempted from recognition by Canadian authorities.
The statement ends uncertainty as to whether domestic clearing would be required for trades between Canadian counterparties for certain asset classes such as Canadian dollar interest rate swaps. It is understood that establishing a Canadian CCP could be a costly endeavor that could introduce inefficiencies that would outweigh the benefits regulators see in having primary oversight and jurisdiction over an onshore CCP.
Additionally, in the absence of a regulatory requirement mandating domestic clearing of certain classes of OTC derivatives, and assuming that U.S. and European CCPs meet the demands of Canada’s market participants and regulators, it would be difficult for a domestic CCP to attract a substantial share of the Canadian OTC derivatives market.
According to law firm Blakes, it appears that Canadian securities regulators will require each CCP with Canadian clearing members to apply for local recognition (or an exemption) and meet Canadian requirements rather than granting any blanket exemptions to G20-recognized CCPs. Shortly after the Financial Stability Boards June 2012 progress report on moves to clear OTC derivatives trades through a global CCCP was issued, the CSA published comment reaffirming “recognition of non-Canadian CCPs will require that Canadian regulators are comfortable that they can exert appropriate and effective regulatory powers over the foreign CCP, which in many cases will require Canadian regulators to develop co-operative regulation regimes with regulators outside of Canada”.
It remains to be seen whether there is any conflict between the CSA’s desire for regulatory powers over foreign CCPs and the scope of the co-operative oversight arrangements referred to by the FSB. The CSA Consultation Paper noted that: “Work on developing memoranda of understanding with these non-Canadian regulators needs to be undertaken immediately to ensure that Canadian regulators receive the information and co-operation required to oversee the non-Canadian CCPs that they have recognized or exempted from recognition.” In addition, it is conceivable that the Bank of Canada may take on a more extensive regulatory recognition and oversight role in connection with foreign CCPs.
The Canadian regulators also indicated in the Statement that they “are satisfied with the direction and pace of the international efforts on the four safeguards, including with regard to implementation at global CCPs serving the Canadian market”.
Canada, together with other members of the G20, committed in 2009 at the Pittsburgh Summit of the G20 to require the trading of all standardized OTC derivative contracts on exchanges or electronic trading platforms their clearing through CCPs where appropriate, and their reporting to trade repositories by the end of 2012. Canada reaffirmed this commitment at the Toronto Summit of the G20 in 2010.
(JDC)