In 2015, the Canadian Securities Administrators (CSA) proposed mandatory central counterparty clearing of certain standardized over-the-counter (“OTC”) derivatives transactions consistent with its goal to improve transparency in the OTC derivatives market and enhance the overall mitigation of systemic risk: National Instrument 94-101 Mandatory Central Counterparty Clearing of Derivatives and its related Companion Policy 94-101CP (NI 94-101) and National Instrument 94-102 Derivatives: Customer Clearing and Protection of Customer Collateral and Positions and its related Companion Policy 94-102CP (NI 94-102).
NI 94-101 requires certain counterparties to clear specified standardized OTC derivatives through a central counterparty clearing agency, unless an exemption is available in the instrument. For a detailed overview of NI 94-101, we refer you to our previous article on NI 94-101.
NI 94-102 is designed to protect a local customer’s positions and collateral when clearing OTC derivatives and to improve clearing agencies’ resilience to default by a clearing intermediary: it includes requirements related to the segregation and portability of customer collateral and positions as well as detailed record-keeping, reporting and disclosure requirements. For a detailed overview of NI 94-102, we refer you to our previous article on NI 94-102.
On January 19, 2017, the CSA announced that, subject to necessary approvals, NI 94-101 would come into force on April 4, 2017 and NI 94-102 would come into force on July 3, 2017.
The main amendments made to the 2015 proposed draft of NI 94-102 are as follows:
- Options on securities are not subject to the segregation and portability requirements. They remain subject to applicable securities regulations or derivatives regulations (in Québec) in order to maintain some consistency with the approaches adopted in the United States (US) and the European Union (EU).
- Record retention provisions have been amended to avoid duplicative retention of records by both the clearing agencies and clearing intermediaries.
- Provisions relating to the transfer of a customer’s positions and collateral upon default by a direct intermediary provide more flexibility to facilitate the transfer.
- Substituted compliance is available where a foreign clearing intermediary or regulated clearing agency in compliance with comparable laws of the US or the EU is involved in clearing a local customer’s cleared derivatives. However, the retention of records, reporting on customer collateral to the customer and the regulator, and the segregation of customer collateral from other property of the customer requirements still apply.
- Information on customer collateral required to be reported to regulators is required on an aggregate basis, rather than on an individual customer basis; however, there is no substitute compliance for the customer collateral reports requirements.
The main amendments made to the 2015 proposed draft of NI 94-101 are as follows:
- Affiliated entities of a clearing participant are subject to NI 94-101’s clearing obligation only if its month-end gross notional amount of outstanding OTC derivatives exceeds CAD$ 1 billion, excluding intragroup transactions. A 90 day transition period is provided to such affiliated entities following the date on which it reaches the CAD$ 1 billion threshold.
- A six month transition period after the effective date of NI 94-101 (expected to be April 4, 2017) is provided to market participants that are not clearing participants, but are subject to NI 94-101, in order to set up clearing relationships.
- The companion policy to 94-101 specifies that parties may rely upon factual statements of the other party to determine whether the other party is subject to NI 94-101, as long as it does not have reasonable grounds to believe such statements are false.
- The companion policy to 94-101 clarifies how to treat swaptions, complex swaps and packaged transactions: (a) swaptions entered into before the effective date of NI 94-101, even physically settled after the effective date, do not have to be mandatorily cleared; (b) counterparties do not have to disentangle a mandatory clearable component of a complex swap in order to clear that portion; however (c) counterparties must clear each mandatory clearable component of packaged transactions.
- Substituted compliance is available to foreign derivatives dealers who are “local counterparties” if the mandatory clearable derivative is submitted for clearing in accordance with the mandatory clearing rules in the US or the EU.
In Quebec, the Autorité des marchés financiers (AMF) has published consequential amendments to Regulation 91-506 respecting Derivatives Determination (Regulation 91-506) and its related Policy Statement to Regulation 91-506 respecting Derivatives Determination in order to include references to NI 94-101 and NI 94-102.
Regulation 91-506 currently determines the scope of application of Regulation 91-507 respecting Trade Repositories and Derivatives Data Reporting. Once NI 94-101 and NI 94-102 come into force, Regulation 91-506 will also determine the scope of derivatives subject to mandatory clearing and protection of customer collateral rules.