Canadian Securities Administrators publish consultation paper on margin requirements for non-centrally cleared derivatives

Alison Beer

Yesterday the CSA published for comment a Consultation Paper proposing a framework for margin requirements on non-centrally cleared derivatives. The invitation to provide comments on the proposal ends September 6, 2016.

The requirements under the Consultation Paper are based on the minimum standards for margin requirements for non-centrally cleared derivatives developed by the Basel Committee on Banking Supervision (BCBS) and the International Organization for Securities Commission (IOSCO) (the BCSBS-IOSCO Standards) that apply to certain financial entities and systemically important non-financial entities. The CSA has also stated that the proposed framework is largely consistent with OSFI Guideline E-22 on Margin Requirements for Non-Centrally Cleared Derivatives applicable in Canada to federally regulated financial institutions (FRFIs). FRFIs will not be subject to the proposed framework (although FRFI’s are included in the definition of “financial entities” for the purpose of defining the “covered entities” with which a counterparty that is not a FRFI will be required to exchange margin).  

 Under the proposed framework, all “covered entities” that trade non-centrally cleared derivatives will be required to exchange margin where the other counterparty is also a covered entity.  A “covered entity” is defined as a financial entity whose aggregate month-end average notional amount outstanding in non-centrally cleared derivatives exceeds $12 billion dollars. In general, this threshold will be calculated on a corporate group basis and excludes intragroup transactions. The proposed definition of “financial entity” covers, among others, cooperative credit associations, banks, loan companies, trust companies, insurance companies, credit unions, caisses populaires, pension funds, investments funds and both registered and exempt dealers that trade derivatives.

Other key elements of the CSA’s proposed framework include, among other things, a discussion about the following:

(i) the scope of derivatives that will be subject to the margin requirements;

(ii) the minimum amount of initial and variation margin that will need to be collected for non-centrally cleared derivatives, including the methodologies by which that minimum baseline amount would be calculated;

(iii) the collateral that will be eligible to be used to for margin purposes, including appropriate haircuts;

(iv) the treatment of collateral, including segregation requirements for initial margin and standards imposed on rehypothecating collateral; and

(v) the treatment of transactions with affiliates.

Stay tuned for our follow-up analysis on the proposed framework.

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