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:
- central clearing of OTC derivatives that are determined to be appropriate for clearing and capable of being cleared, such as standardized derivatives;
- reporting of all derivatives trades by Canadian counterparties to a trade repository;
- electronic trading of OTC derivative products; and
- in accordance with the recommendations of the Basel II Accord, imposing capital requirements proportionate to the risks that an entity assumes.
The focal point of the proposal, being the central clearing of OTC derivatives, reflects the approach taken by the Dodd-Frank Act. With respect to trade reporting to a trade repository, while the report makes no recommendation regarding a specific time requirement for reporting it does state that real-time reporting will ultimately be required. The report further recommends that 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 recommends that defined categories of end-users be exempted from these proposals but acknowledges that this approach requires further study to determine, among other things, applicable conditions and thresholds. A number of other issues are also identified as requiring further study and analysis, including the segregation of capital in the OTC derivatives context, the location and type of central counterparty clearing house (referred to as a “CCP”), including assessment of the use of international CCPs vs. a Canadian solution. Registration requirements and exemptions from such requirements are also not covered in the report but will reportedly be the subject of future consultation.
The report specifically notes that clear jurisdictional authority and specific rule-making powers will need to be set out in provincial securities and derivatives legislation to address all of the subject areas addressed. The CSA will also need to develop information sharing and co-operation agreements with international regulators, foreign trade repositories and CCPs.
The Committee has set out a number of specific questions pertaining to its recommendations and is accepting comments on the consultation paper until January 14, 2011. The Committee is working under Canada’s G20 commitment to meet a 2012 deadline and will continue to move forward by developing legislative proposals and drafting proposed rules.