On July 7, 2016, the CSA Derivatives Committee (the Committee) released another consultation paper with respect to derivatives, CSA Consultation Paper 95-401 – Margin and Collateral Requirements for Non-Centrally Cleared Derivatives. The paper is the latest in a series of consultations, proposals and published rules resulting from G20 summits held subsequent to the 2008 financial crisis, and deals with the higher risks of non-centrally cleared derivatives and promotes central counterparty clearing. The recommendations of the Committee are based on the standards set by the Basel Committee on Banking Supervision and the International Organization for Securities Commissions, and are similar to guidelines published in Canada by the Office of the Superintendent of Financial Institutions (OSFI) applicable to federally regulated financial institutions.

The Committee has recommended that, subject to limited exceptions, counterparties to a non-centrally cleared derivative transaction would be required to exchange initial margin and deliver variation margin. The requirements would apply where the counterparties are financial entities (which would include pension funds, investment funds and persons registered or exempt from registration as a result of trading in derivatives) with an aggregate month-end average notional amount under outstanding noncentrally cleared derivatives above Cdn $12 billion. A counterparty could choose to calculate the amount of initial margin based on either a quantitative margining model or a prescribed standardized schedule.

Initial margin would have to be exchanged by a counterparty in circumstances where the total amount of initial margin required to be delivered under all outstanding non-centrally cleared derivatives using the formula chosen exceeded Cdn $75 million, and the specific amount to be exchanged would be only the amount required over and above the $75 million threshold. Initial margin is intended to protect counterparties during the time it takes to close out a position in the event of a counterparty default, and variation margin is intended to mitigate risks from the fluctuations in the value of a derivative. Variation margin would be calculated using an appropriate valuation method and should be sufficient to fully collateralize the exposure of the derivatives transaction. Initial or variation margin would not have to be delivered if the sum of the two is less than $750,000. In addition to other requirements, entities to whom a final rule applied would be required to enter into agreements with each other counterparty that is subject to the rule, to establish rights and obligations in relation to matters such as exchange of margin, use of collateral (including segregation) and the process to resolve defaults.

A number of specific questions are asked in the paper, and comments will be accepted to September 6, 2016. I