The Canadian Securities Administrators released a consultation paper today intended to build on earlier proposals to construct a framework for the treatment of market participant collateral in centrally cleared OTC derivatives transactions. Specifically, the paper addresses the segregation of assets put forward as collateral for OTC derivatives transactions cleared through a central counterparty by customers that access the CCP indirectly through clearing members. The paper also addresses the transfer of customer collateral and customer positions upon the default or insolvency of the clearing member of a CCP.
According to the CSA, the paper's recommendations are intended to ensure that "CCPs clearing OTC derivatives possess adequate rules and infrastructure to facilitate the segregation and portability of collateral in a manner that provides market participants with appropriate protections". To that end, the paper recommends, among other things: (i) that clearing members be required to segregate customer collateral from their own proprietary assets and that the Complete Legal Segregation Model (whereby all customers' collateral is permitted to be held on an omnibus basis, but is recorded and attributed by both the CCP and clearing member to each customer based on their collateral advanced) be employed; (ii) that if CCPs or clearing members are permitted to reinvest posted customer collateral, investments should be restricted to instruments with minimal credit, market and liquidity risk; (iii) that CCPs should hold customer collateral at one or more supervised and regulated entities that have robust accounting practices, safekeeping procedures and internal controls; (iv) requiring CCPs to make the segregation and portability arrangements contained in their rules and policies available to the public in a clear and accessible manner; (v) that provincial market regulators enact rules requiring that every OTC derivatives CCP be structured to facilitate the portability of customer positions and collateral; and (vi) that parties to an uncleared OTC derivatives transaction be free to negotiate the level of segregation required for collateral.
The CSA is accepting public comment on the consultation paper, including with respect to the specific questions posed regarding its recommendations, until April 10, 2012.
The paper is one of a series of eight papers building on the high-level proposals found in Consultation Paper 91-401 released in November 2010. For more information, see CSA Consultation Paper 91-404 Derivatives: Segregation and Portability in OTC Derivatives Clearing.
