CSA publish consultation paper on OTC derivatives regulation
The Canadian Securities Administrators yesterday published a consultation paper on over-the-counter derivatives regulation in Canada intended to address "some of the deficiencies that have become apparent in the OTC derivatives market". Specifically, the consultation paper provides background on the need for regulation and provides a number of specific proposals. Among other things, the report recommends and requests comments on:
- mandatory central clearing of OTC derivatives that are determined to be appropriate for clearing and capable of being cleared, such as standardized derivatives. This is the approach taken by the Dodd-Frank Act;
- amending provincial securities legislation to mandate the reporting of all derivatives trades by Canadian counterparties to a trade repository. The report makes no recommendation regarding a specific time requirement for reporting but states that real-time reporting will ultimately be required;
- in the near term, having provincial regulators obtain regulatory authority to mandate electronic trading of OTC derivative products. The report states, however, that further study will be necessary to determine "the eventual scope of a regulatory mandate";
- in accordance with the recommendations of the Basel II Accord, imposing capital requirements proportionate to the risks that an entity assumes;
- establishing exemptions for defined categories of end-users that use OTC derivatives to hedge a variety of risks. The report states, however, that it would not be appropriate to provide an exemption for speculative derivative trades or an exemption to financial entities; and
- having provincial regulators obtain authority to conduct surveillance on OTC derivatives markets, develop robust market conduct standards and obtain authority to investigate and enforce against abusive practices.
The report also states that further analysis is required before making a recommendation regarding the segregation of capital in the OTC derivatives context.
The Committee, which also set out a number of specific questions pertaining to its recommendations, is accepting comments on the consultation paper until January 14, 2011. According to the Committee, it will move forward by continuing to develop legislative proposals and beginning to draft proposed rules.
