New Coordinated Rules Relating to the Clearing of Over-the-Counter Derivatives in Canada

Written By Mark S. Powell

On January 19, 2017, the securities regulators in each of the provinces and territories of Canada published a notice that they have finalized two new derivatives rules as part of their ongoing G20 commitment to regulate over-the-counter derivatives in Canada.

These rules are:

1. National Instrument 94-101 entitled Mandatory Central Counterparty Clearing of Derivatives (Mandatory Clearing Rule)
2. National Instrument 94-102 entitled Derivatives: Customer Clearing and Protection of Customer Collateral and Positions (Customer Clearing and Protection Rule)

Mandatory Clearing Rule

The Mandatory Clearing Rule is anticipated to be in force as of April 4, 2017, and requires that, unless there is an exemption available, certain standardized interest rate swaps and forward agreements that have been entered by parties on an over-the-counter basis be submitted to a regulated clearing agency for clearing. The purpose of the rule is to reduce counterparty risk in the derivatives market and increase financial stability.  In order to clear these transactions through a regulated clearing agency, the parties will need to comply with the rules of that clearing agency such as the requirements to post credit support with the clearing agency.

Fortunately, there are a number of exemptions available and, for the vast majority of our clients, we do not anticipate there being a need to clear the relevant transactions through a regulated clearing agency. 

That being said, in order to rely on certain of these exemptions, there are some additional steps that must be taken.  For example, in order to rely on the exemption relating to transactions amongst affiliates, the affiliates must enter into certain agreements as well as submit notices to the applicable regulators.

Although the Mandatory Clearing Rule is anticipated to be in force as of April 4, 2017, unless both of the counterparties to transaction have entered arrangements with regulated clearing agency in advance of October 4, 2017, there should be no need to submit transactions to a regulated clearing agency for clearing under the Mandatory Clearing Rule until October 4, 2017.

Customer Clearing and Protection Rule

In connection with the obligations to clear certain over-the-counter transactions through a regulated clearing agency, the Canadian securities regulators have finalized the Customer Clearing and Protection Rule.  It is anticipated to be in force as of July 3, 2017.

The purpose of the rule is to ensure that the clearing of transactions by a clearing agency and intermediaries will occur in a manner that protects the counterparties' positions and collateral.  The Customer Clearing and Protection Rule is intended to improve the regulated clearing agencies' resilience to a default by a clearing agency or intermediary.

The Customer Clearing and Protection Rule imposes obligations on the clearing agency and intermediaries relating to the provision of clearing services, the segregation and use of credit support provided by the counterparties and the transfer of credit support and trading positions in the event of a default of a clearing agency or intermediary.  In addition, the rule details several recordkeeping, reporting and disclosure requirements imposed on clearing agencies.

If you have any questions relating to your obligations to clear over-the-counter derivatives transactions through a clearing agency or have any questions relating to the requirements being imposed on the clearing agencies, please do not hesitate to contact us.