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Canada has implemented a mandatory central counterparty (CCP) clearing regime for certain over-the-counter (OTC) derivatives. This regulatory framework is primarily overseen by the Canadian Securities Administrators (CSA) and is encapsulated in National Instrument 94-101 Mandatory Central Counterparty Clearing of Derivatives (NI 94-101) and its companion policy.
Here’s a breakdown of the key aspects:
1. Purpose and Objectives:
* The primary goal is to enhance financial stability and mitigate systemic risk in the Canadian financial markets.
* It aims to reduce counterparty risk by interposing a CCP between the two original counterparties to a derivative transaction.
* It also seeks to improve transparency in the OTC derivatives market.
2. Scope of Mandatory Clearing:
* NI 94-101 requires “local counterparties” to submit certain “mandatory clearable derivatives” for clearing to a regulated clearing agency.
* Local Counterparties: Generally, these are entities organized under Canadian law, or those with their head office or principal place of business in Canada. It can also include affiliated entities of a clearing participant under certain conditions.
* Mandatory Clearable Derivatives: The CSA specifies which classes of OTC derivatives are subject to mandatory clearing. This list is periodically updated to reflect market developments (e.g., transition to new interest rate benchmarks). Currently, this primarily includes certain standardized interest rate swaps (IRS) and credit default swaps (CDS).
* Regulated clearing agencies are required to publish lists of derivatives they clear and specify which ones are mandatory clearable.
3. Exemptions:
NI 94-101 provides for certain exemptions from mandatory clearing to avoid undue burden:
* End-User Exemption: Applies when at least one of the counterparties is not a financial entity and is entering into the transaction to hedge or mitigate its commercial risk or that of an affiliate. Records must be maintained to demonstrate the hedging purpose.
* Intragroup Exemption: Applies to transactions between affiliated entities within the same corporate group, provided certain conditions are met, such as consolidated financial statements and an agreement to rely on the exemption.
* Multilateral Portfolio Compression Exemption: Applies in specific circumstances involving multilateral portfolio compression.
4. Regulatory Bodies:
* Canadian Securities Administrators (CSA): This is the council of the securities regulators of Canada’s provinces and territories. They are responsible for developing and enforcing the clearing rules, including NI 94-101.
* Office of the Superintendent of Financial Institutions (OSFI): While the CSA handles clearing requirements, OSFI, as the prudential regulator for federally regulated financial institutions (FRFIs), sets out margin requirements for non-centrally cleared derivatives for these institutions. This acts as a complementary measure to mitigate risks for OTC derivatives that are not subject to mandatory clearing.
5. Recent Developments:
* The CSA regularly proposes amendments to NI 94-101 to adapt to evolving market practices and international standards. For example, recent proposals have focused on updating the list of mandatory clearable derivatives to align with the transition to new overnight risk-free interest rate benchmarks and adding new classes of swaps.
In essence, Canada has established a robust framework for mandatory central counterparty clearing of standardized OTC derivatives, aligning with global efforts to enhance financial stability and transparency in these markets.

Video courtesy of Eurex

Video courtesy of Eurex