On October 12, 2017, the Canadian Securities Administrators (CSA) proposed for comment amendments (Amendments) to National Instrument 94-101 Mandatory Central Counterparty Clearing of Derivatives (NI 94-101), in order to refine the scope of entities that will become subject to mandatory clearing requirements beginning in August 2018.
Clearing members that subscribe for a regulated clearing agency’s clearing services in respect of mandatory clearable derivatives (Clearing Agency Participants) have been subject to the mandatory clearing obligations under NI 94-101 (Clearing Requirements) since NI 94-101 came into force in April 2017.
As discussed in our August 2017 Blakes Bulletin: Mandatory Clearing of OTC Derivatives Delayed for Certain Entities, the following two additional classes of counterparties will become subject to the Clearing Requirements in August 2018:
- Affiliates of Clearing Agency Participants if the affiliate has had in excess of C$1-billion gross notional of outstanding OTC derivatives as of any month-end following the entry into force of the rule, excluding intragroup transactions (Participant Affiliates)
- Local counterparties that, together with their local counterparty affiliates, have had in excess of C$500-billion gross notional of outstanding OTC derivatives as of any month-end following the entry into force of the rule, excluding intragroup transactions (Large Counterparties).
For general background on NI 94-101, see our January 2017 Blakes Bulletin: Canadian Regulators Finalize Mandatory OTC Derivatives Clearing Rules.
EXCLUSION OF TRUSTS AND INVESTMENT FUNDS FROM THE CLEARING REQUIREMENT
The Amendments provide that neither trusts nor investment funds (as such term is defined in National Instrument 81-106 Investment Fund Continuous Disclosure) will be included in the Participant Affiliate or Large Counterparty categories described above. Accordingly, following implementation of the Amendments no trusts or investment funds will be subject to the Clearing Requirements, and counterparties of trusts and investment funds will also not be required to clear OTC derivatives entered into with such entities. The one exception would be that a trust or investment fund would still be subject to the Clearing Requirements if it was itself a Clearing Agency Participant, but that is generally not expected to occur in practice.
These changes address a concern that some trusts and investment funds that are operated independently and do not raise systemic risk concerns could be caught due to their affiliation with Clearing Participants and Large Counterparties.
REFINEMENTS TO THE CLASS OF LARGE COUNTERPARTIES
Two other important changes are proposed to the class of Large Counterparties, which will be subject to the Clearing Requirements. First, for the purposes of aggregating outstanding derivatives notional amounts to determine if an entity meets the local group-wide threshold of C$500-billion under the Large Counterparty definition, derivatives entered into by affiliated trusts and investment funds will no longer be included.
Second, the Amendments will also exclude from the class of Large Counterparties any counterparty that has not had in excess of C$1-billion of outstanding gross notional in derivatives (excluding intragroup transactions) as of any month-end following the entry into force of the rule.
REVISED LIST OF MANDATORILY CLEARABLE DERIVATIVES
The Amendments also revise the list of classes of derivatives transactions that are subject to mandatory clearing, by removing from the list (1) overnight index swaps with variable notional type and (2) forward rate agreements with variable notional type. The CSA indicate that these derivatives transactions are being removed as they are not currently offered for clearing by any recognized clearing agency.
The CSA are accepting comments on the proposed amendments until January 10, 2018.