National Instrument 94-102 Derivatives: Customer Clearing and Protection of Customer Collateral and Positions and Related Companion Policy
National Instrument 94-102 Derivatives: Customer Clearing and Protection of Customer Collateral and Positions and Related Companion Policy
CSA Notice of
National Instrument 94-102 Derivatives: Customer Clearing and
Protection of Customer Collateral and Positions
and
Related Companion Policy
CSA Notice of National Instrument 94-102 Derivatives: Customer Clearing and Protection of Customer Collateral and Positions and Related Companion Policy
January 19, 2017
Introduction
The Canadian Securities Administrators (the CSA or we), are adopting:
• National Instrument 94-102 Derivatives: Customer Clearing and Protection of Customer Collateral and Positions including:
January 19, 2017
Introduction
The Canadian Securities Administrators (the CSA or we), are adopting:
• National Instrument 94-102 Derivatives: Customer Clearing and Protection of Customer Collateral and Positions including:
• Form 94-102F1 Customer Collateral Report: Direct Intermediary
• Form 94-102F2 Customer Collateral Report: Indirect Intermediary
• Form 94-102F3 Customer Collateral Report: Regulated Clearing Agency
(the Instrument), and
• Companion Policy 94-102 Derivatives: Customer Clearing and Protection of Customer Collateral and Positions (the CP)
(together, the National Instrument).
In some jurisdictions, government ministerial approvals are required for the implementation of the Instrument. Provided all necessary approvals are obtained, the National Instrument will come into force on July 3, 2017.
The CSA Derivatives Committee (the Committee) has consulted and collaborated with the Bank of Canada, the Office of the Superintendent of Financial Institutions (Canada), the Department of Finance Canada and market participants on the National Instrument. The Committee also continues to contribute to and follow international regulatory developments. In particular, members of the Committee work with international regulators and bodies such as the International Organization of Securities Commissions and the OTC Derivatives Regulators' Group in the development of international standards and regulatory practices.
Although a significant market in Canada, the Canadian over-the-counter (OTC) derivatives market comprises a relatively small share of the global market, and a substantial portion of derivatives entered into by Canadian market participants involve foreign counterparties. The CSA endeavours to develop rules for the Canadian market that are aligned with international practices to ensure that Canadian market participants have access to the international market and are regulated in accordance with international principles.
We would like to draw your attention to another publication: CSA Notice of National Instrument 94-101 Mandatory Central Counterparty Clearing of Derivatives which is being published concurrently with this Notice. This publication, and the National Instrument, relate to central counterparty clearing.
Substance and Purpose
The purpose of the Instrument is to ensure that the clearing of a local customer's OTC derivatives is carried out in a manner that protects the customer's positions and collateral and improves derivatives clearing agencies' resilience to default by a clearing intermediary. For a more detailed explanation of customer clearing please see CSA Consultation Paper 91-404 Derivatives: Segregation and Portability in OTC Derivatives Clearing.{1}
The Instrument contains requirements for the treatment of customer collateral by clearing intermediaries providing clearing services to local customers and derivatives clearing agencies located in Canada or providing clearing services to local customers. The Instrument includes requirements relating to the segregation and use of customer collateral that are designed to protect customer collateral, particularly in the case of financial difficulties of a clearing intermediary. The Instrument also includes detailed recordkeeping, reporting and disclosure requirements intended to make customer collateral and positions readily identifiable. Finally, the Instrument contains requirements relating to the transfer or porting of customer collateral and positions intended to result, in the event of default or insolvency of a clearing intermediary, that customer collateral and positions can be transferred to one or more non-defaulting clearing intermediaries.
Background and Summary of Written Comments Received by the CSA
On January 16, 2014, the CSA published for comment CSA Notice 91-304 Proposed Model Provincial Rule on Derivatives: Customer Clearing and Protection of Customer Collateral and Positions (the Model Rule). The Committee modified the Model Rule in response to public comments and on January 21, 2016, Proposed National Instrument 94-102 Derivatives: Customer Clearing and Protection of Customer Collateral and Positions (the Proposed Instrument) was published by CSA Notice for a 90-day comment period.
During the last comment period, we received submissions from six commenters on the Proposed Instrument. We thank all of the commenters for their input. We have carefully reviewed the comments received and revised the Proposed Instrument. The names of the commenters and a summary of their comments, together with our responses, are contained in Annex A of this Notice. Copies of the submissions on the Proposed Instrument can be found on the websites of the Alberta Securities Commission, Ontario Securities Commission{2} and Autorité des marchés financiers.{3}
Summary of the Instrument
The Instrument is divided into 11 Parts.
Part 1 of the Instrument sets out relevant definitions and specifies that the Instrument applies only to cleared OTC derivatives where a customer, regulated clearing agency or clearing intermediary has a specified nexus to a local jurisdiction.
Part 2 to Part 4 of the Instrument set out requirements applicable to clearing intermediaries with respect to treatment of customer collateral, recordkeeping and disclosure.
Part 2 of the Instrument sets out the manner in which a customer's collateral is to be treated by clearing intermediaries, including requirements in respect of the collection, holding and maintenance of customer collateral, the identification of excess margin as well as the segregation, use and investment of customer collateral. Part 2 also sets out requirements that a clearing intermediary must meet to provide clearing services to a local customer including appropriate risk management in respect of those services.
Under Part 3 of the Instrument, clearing intermediaries are required to keep and retain certain records and supporting documentation as well as keep adequate and appropriately updated books and records that facilitate the identification and protection of a customer's positions and collateral.
Part 4 of the Instrument sets out reporting and disclosure requirements for clearing intermediaries, including reporting required to be submitted to the regulator or the securities regulatory authority.
Part 5 to Part 7 of the Instrument are parallel to Part 2 to Part 4 of the Instrument and set out similar requirements as they apply to regulated clearing agencies.
Part 5 of the Instrument sets out how a customer's collateral is to be treated by regulated clearing agencies, including requirements in respect of the collection, holding and maintenance of customer collateral, the identification of excess margin as well as the segregation, use and investment of customer collateral.
Under Part 6 of the Instrument, regulated clearing agencies are required to keep certain records and supporting documentation as well as keep adequate and appropriately updated books and records that facilitate the identification and protection of a customer's positions and collateral.
Part 7 of the Instrument sets out reporting and disclosure requirements for regulated clearing agencies, including reporting required to be submitted to the regulator or the securities regulatory authority.
Part 8 of the Instrument sets out the requirements for a regulated clearing agency to facilitate the transfer of a customer's positions and collateral in the context of a clearing intermediary's default or at the request of a customer. Part 8 also requires a clearing intermediary that provides clearing services to an indirect intermediary to have policies and procedures for transferring the positions and collateral of a customer of the indirect intermediary.
Under Part 9 of the Instrument, clearing intermediaries and regulated clearing agencies located outside Canada may be exempt from the Instrument if they comply with the requirements of comparable legislation of a foreign jurisdiction specified in Appendix A to the Instrument. Despite the exemption from the Instrument provided for in Part 9, clearing intermediaries and regulated clearing agencies that offer clearing services to local customers will remain subject to certain provisions under the Instrument, as specified in Appendix A to the Instrument.
Part 10 of the Instrument contains provisions authorizing the regulator or the securities regulatory authority, as the case may be, to grant an exemption from any provision of the Instrument.
Part 11 of the Instrument sets out the effective date for the Instrument.
Summary of Changes to the Proposed Instrument
(a) Non-application to OTC options on securities
We received comments noting that the Instrument would extend the application of segregation and portability requirements to options on securities in a manner that is inconsistent with other regulatory regimes internationally. In response to these comments, we determined that the Instrument will not apply to OTC options on securities. Under securities legislation in Canada, options on securities are subject to regulation as securities, or in Québec as derivatives.{4} Options on securities will continue to be regulated as securities, or in Québec as derivatives, under the existing securities legislation in Canada and remain subject to the investor protections included in these regimes. This is consistent with approaches employed in the United States and the European Union.
(b) Record retention
Changes have been made to the record retention provisions for clearing intermediaries and regulated clearing agencies to avoid duplicative retention of records. These changes were made in response to several comments received that pointed out how recordkeeping efficiencies could be incorporated into the Instrument.
For clearing intermediaries, different retention requirements apply to (i) records and documentation related to individual cleared derivatives and (ii) all other records and information collected for a customer. Records related to a cleared derivative are required to be retained for at least seven years after the expiration of the cleared derivative while customer profiles, account agreements or other general information collected from a customer at any time by a clearing intermediary providing clearing services for the customer must be kept for at least seven years after the date upon which the customer's last derivative that is cleared with the clearing intermediary expires or is terminated.
Regulated clearing agencies are now required to keep records only until the expiry or termination of the cleared derivative to which the record relates. Since clearing intermediaries are required to maintain records relating to a particular cleared derivative for at least seven years after the termination of the cleared derivative, this change to the Instrument avoids duplication of the records already maintained by clearing intermediaries.
(c) Transfer of collateral and positions upon default vs. business-as-usual
We received comments discussing the challenges associated with transferring a customer's positions and collateral in both non-default, or "business-as-usual", transfer scenarios and during the default of a direct intermediary. In particular, the commenters noted that in a default scenario, it is sometimes necessary to rely on negative consent from a customer (i.e., the customer's silence), where a customer has not provided instructions or it is not possible to transfer a customer's collateral and positions in accordance with its instructions. We acknowledge there are differences between a transfer of a customer's positions and collateral upon default by a direct intermediary and a business-as-usual transfer upon request from the customer, and separate provisions for these scenarios have been included in the Instrument. The provision relating to the transfer of a customer's positions and collateral upon default by a direct intermediary provides additional flexibility to facilitate a transfer while taking into account any instructions that a customer may have provided in contemplation of a clearing intermediary's default.
(d) Substituted compliance
Currently, OTC derivatives clearing infrastructure and clearing service providers are largely concentrated outside of Canada. Therefore, it is likely that many local customers' cleared derivatives will involve foreign clearing infrastructure or clearing service providers. We received comments requesting exemptions from the Instrument where a clearing intermediary or regulated clearing agency complies with comparable laws of a foreign jurisdiction. As a result, we carefully considered the interaction of the Instrument with foreign customer clearing regimes that may also apply to a cleared derivative involving local customers. The Instrument provides for an exemption from the Instrument based on the concept of substituted compliance where a foreign clearing intermediary or regulated clearing agency in compliance with the comparable laws of the United States or the European Union is involved in clearing a local customer's cleared derivatives. However, despite a clearing intermediary or regulated clearing agency qualifying for the exemption from the Instrument by substituted compliance, certain provisions in the Instrument will still apply to foreign entities providing clearing services to local customers. These "residual provisions" include the retention of records, reporting on customer collateral to the customer and the regulator and the segregation of customer collateral from other property of the customer. The residual provisions that apply to a clearing intermediary or regulated clearing agency depend on the comparability of the applicable foreign laws, and therefore on whether the foreign entity complies with the laws of the United States or the European Union.
(e) Customer collateral reports -- regulatory
We received comments regarding the information about customer collateral required to be reported to the regulator or securities regulatory authority. Commenters asked that the information reported by clearing intermediaries and regulated clearing agencies in Form 94-102F1, Form 94-102F2 and Form 94-102F3 pursuant to section 25 and section 43 of the Instrument be more closely harmonized with similar reporting requirements under the U.S. Commodity Futures Trading Commission's rules. In response to these comments, among other changes, information on customer collateral is now required on an aggregate basis, rather than on an individual customer basis.
Commenters also requested that reporting on customer collateral to the regulator or securities regulatory authority be included in the provisions for which an exemption based on substituted compliance is available. However, the information reported on Form 94-102F1, Form 94-102F2 and Form 94-102F3 is of importance to securities regulatory authorities. Consequently, section 25 and section 43 of the Instrument are not included in the exemption based on substituted compliance.
(f) International harmonization and miscellaneous drafting clarifications
There are a number of drafting changes throughout the Instrument to respond to comments from clearing agencies and clearing intermediaries that work to harmonize the Instrument with international regulatory regimes and more accurately reflect customer collateral and position segregation, recordkeeping and reporting practices.
Local Matters
The scope of derivatives subject to the Instrument in each local jurisdiction is set out in Ontario Securities Commission Rule 91-506 Derivatives: Product Determination,{5} Manitoba Securities Commission Rule 91-506 Derivatives: Product Determination,{6} Québec Regulation 91-506 respecting Derivatives Determination{7} (Québec Regulation 91-506) and Multilateral Instrument 91-101 Derivatives: Product Determination.{8}
Concurrently with the publication of this Notice, the Autorité des marchés financiers is publishing consequential amendments in respect of the National Instrument to Regulation 91-506.
Anticipated Costs and Benefits
The Instrument is intended to facilitate development of the Canadian market for clearing customer OTC derivatives in a safe and efficient manner. It is intended to provide investor protection for local customers using clearing services that are equivalent to the protections offered in major foreign markets and provide systemic benefits to the Canadian market. There will be compliance costs for clearing service providers that may increase the cost of clearing for market participants. The benefits to the Canadian market and to local customers from implementing the Instrument significantly outweigh the compliance costs to market participants. The major benefits and costs of the Instrument are described below.
(a) Benefits
The two major benefits of the Instrument are the reduction of systemic risk and the protection of customers and their assets when they clear OTC derivatives through clearing agencies.
(i) Mitigation of Systemic Risk
The Group of Twenty has agreed that requiring standardized and sufficiently liquid OTC derivatives to be cleared through central counterparties will result in more effective management of counterparty credit risk. The clearing of OTC derivatives may also contribute to greater stability of our financial markets and to a reduction in systemic risk. Along with mandatory central counterparty clearing, minimum capital requirements and margin requirements for non-centrally cleared derivatives may create additional incentives for central counterparty clearing.
The Instrument is designed to create a framework for customer clearing that promotes stability of the OTC derivatives market by facilitating, to the greatest extent possible, the porting of customers' positions and collateral. Portability of customers' positions and collateral is a key mechanism to ensure that in the event of a clearing intermediary default or insolvency, customers' positions are not terminated and their positions and collateral can be transferred to one or more non-defaulting clearing intermediaries. Portability can mitigate difficulties associated with stressed market conditions such as a market-wide reduction in liquidity and price dislocation, allow customers to maintain continuous clearing access and generally promotes efficient financial markets.
(ii) Customer Protection
The Instrument is aimed at significantly reducing the likelihood that customers will suffer major financial losses in the event of a clearing service provider's insolvency. In general, customer clearing offers risk mitigation benefits to customers. However, if a robust customer protection regime is not in effect, there can be risks in the clearing process, particularly if a clearing intermediary becomes insolvent. The Instrument provides customer protections that should significantly reduce the likelihood of a range of negative potential consequences, that could occur in the event of a clearing intermediary's insolvency, including:
• forced liquidation of positions;
• loss or inaccessibility of collateral;
• loss of hedge positions necessitating re-entry into the market at time of stress to re-establish positions; and
• market uncertainty.
The Instrument mitigates many of these risks to customers by establishing robust collateral and recordkeeping requirements. It requires a customer's positions to be collateralized at the regulated clearing agency and obligates the regulated clearing agency and clearing intermediaries to keep records that identify customers and their positions in order to facilitate porting.{9}
(b) Costs
Generally, any increased costs resulting from compliance with the Instrument stem from enhanced collateral protection and recordkeeping and reporting requirements for customer collateral and positions. Any costs associated with complying with the Instrument will be borne by clearing intermediaries and regulated clearing agencies and may be passed on to customers through higher initial margin or higher fees for cleared derivatives. There is also a possibility that clearing service providers may be dissuaded from entering or remaining in the Canadian market due to the costs of complying with the Instrument, which would reduce local customers' options for clearing service providers.
(i) Establishing Systems
Clearing intermediaries and regulated clearing agencies may incur up-front costs to develop or modify their recordkeeping and account structure systems in order to comply with the Instrument. However, once the systems are established, the incremental cost of on-going compliance should be less significant.
(ii) Loss of Potential Revenue for Clearing Intermediaries and Clearing Agencies
The Instrument places restrictions on the use and investment of customer collateral held by clearing intermediaries and clearing agencies. Customer collateral may only be invested in liquid and low-risk instruments. The Instrument also requires a regulated clearing agency to collect initial margin from clearing intermediaries for each customer on a gross basis. Collecting gross margin promotes more effective porting of positions which benefits customers. However, this requirement means that less customer collateral will be held at and available for use by clearing intermediaries. These requirements limit the potential revenue that clearing intermediaries and clearing agencies may earn through the use and investment of their customers' collateral.
(iii) Market Access Issues
Currently, OTC derivatives clearing infrastructure and service providers are largely concentrated outside of Canada with the main clearing agencies and clearing intermediaries located in the United States and the European Union. Given the small size of the Canadian market, there is a risk that the costs of analyzing and complying with the Instrument may result in some market participants choosing not to offer customer clearing services in Canada which may limit local customers' access to OTC derivatives clearing services. However, as described above, the Instrument provides for an exemption for clearing intermediaries and regulated clearing agencies located in foreign jurisdictions based on substituted compliance with certain foreign laws. This exemption based on substituted compliance could significantly reduce compliance costs associated with the Instrument for providers of clearing services located in and complying with the laws of the foreign jurisdictions set out in Appendix A to the Instrument.
(c) Conclusion
Protection of customers' positions and collateral is the fundamental principle of the Instrument. It is the Committee's view that the impact of the Instrument, including anticipated compliance costs for market participants, is proportional to the benefits sought. The Instrument aims to provide a level of protection similar to that offered to customers in other jurisdictions with significant OTC derivatives markets. To achieve a balance of interests, the Instrument is designed to deliver a high level of protection to customers transacting in OTC derivatives and create a safer environment in the Canadian market for customers to clear OTC derivatives, while allowing clearing service providers a flexible and competitive market to operate in.
Contents of Annexes
The following annexes form part of this CSA Notice:
• Annex A -- Summary of comments and CSA responses and list of commenters
• Annex B -- National Instrument 94-102 Derivatives: Customer Clearing and Protection of Customer Collateral and Positions
• Annex C -- Companion Policy 94-102CP Derivatives: Customer Clearing and Protection of Customer Collateral and Positions.
Questions
Please refer your questions to any of:
{1} Available at http://www.osc.gov.on.ca/documents/en/Securities-Category9/csa_20120210_91-404_segregation-portability.pdf and http://www.lautorite.qc.ca/files//pdf/consultations/derives/2012fev10-91-404-cons-en.pdf.
{2} Available at http://www.osc.gov.on.ca/en/51109.htm.
{3} Available at http://www.lautorite.qc.ca/en/previous-consultations-derivatives-pro.html.
{4} See National Instrument 14-101 Definitions for a list of statues and other instruments comprising "securities legislation" across Canada. Available at http://www.osc.gov.on.ca/en/14882.htm and http://www.lautorite.qc.ca/files//pdf/reglementation/valeurs-mobilieres/14-101/2011-01-01/2011jan01-14-101-vadmin-en.pdf.
{5} Available at https://www.osc.gov.on.ca/en/SecuritiesLaw_91-506.htm.
{6} Available at http://docs.mbsecurities.ca/msc/irp/en/item/101711/index.doc.
{7} Available at http://www2.publicationsduquebec.gouv.qc.ca/dynamicSearch/telecharge.php?type=3&file=/I_14_01/I14_01R0_1_A.HTM.
{8} Available at http://www.albertasecurities.com, http://www.bcsc.bc.ca, http://www.nbsc-cvmnb.ca, http://nssc.novascotia.ca and http://www.fcaa.gov.sk.ca/Securities%20Division.
{9} The level of protection afforded by the Instrument is dependent on the Instrument's interaction with other foreign and domestic laws such as bankruptcy and insolvency laws and the Payment Clearing and Settlement Act (Canada) as well as provincial and territorial personal property security laws including as they apply to cash collateral.
ANNEX A
SUMMARY OF COMMENTS AND CSA RESPONSES ON PROPOSED NATIONAL INSTRUMENT 94-102 DERIVATIVES: CUSTOMER CLEARING AND PROTECTION OF CUSTOMER COLLATERAL AND POSITIONS
1. Section Reference
2. Summary of Issues/Comments
3. Response
GENERAL COMMENTS
General Comments
Overall, commenters supported creating a domestic regime for the protection of customer positions and collateral to ensure that Canada's derivatives market functions efficiently and continues to maintain the confidence of market participants.
The Instrument addresses the need for a harmonized regime across Canada for the protection of customer positions and collateral. The Instrument furthers the aims of OTC derivatives reform set out by the Group of Twenty and supports the safe, effective and efficient function of Canada's OTC derivatives market.
Support was expressed for substituted compliance in the Instrument. In particular, support was expressed for the revisions that facilitate the operation of different customer clearing models and including the laws of the United States and European Union for substituted compliance. Other commenters cautioned that without an effective substituted compliance regime, the Instrument may result in overlapping, duplicative and burdensome requirements.
Exemptions based on substituted compliance are available where market participants are subject to foreign laws that are substantially the same, on an outcomes basis, as the Instrument, based on a review of the foreign laws. The Instrument permits substituted compliance in specified circumstances and subject to certain conditions where a foreign clearing intermediary or regulated clearing agency clears a derivative and is in compliance with the foreign laws listed in Appendix A to the Instrument.
Two commenters requested that orders exempting certain actions issued by foreign regulatory agencies be included in the substituted compliance approach used in the Instrument.
No change. To include exemptions made by foreign regulatory authorities in the substituted compliance approach under the Instrument would be an impermissible sub-delegation of a securities regulatory authority's legislative powers, as a foreign regulatory authority granting exemptions would be able to bypass the effect of the Instrument without the approval of the securities regulatory authority.
One commenter requested that customer disclosure rules under the U.S. Commodity Futures Trading Commission (CFTC) regulations be deemed equivalent to the disclosure rules in the Instrument. Additionally, the commenter suggested that the Instrument be aligned with the customer disclosure rules and market practice evidenced by CFTC Rule 1.55(k) Disclosure and Default Disclosure, in particular with respect to sections 21, 22, 23, 26 and 27.
Change made. An exemption based on substituted compliance is available to clearing intermediaries that provide disclosure in accordance with CFTC and European Market Infrastructure Regulation (EMIR) disclosure requirements. Additionally, the examples of information to be included in the disclosure provided as guidance in the CP have been clarified.
Two commenters requested clarification regarding whether equity options would be within the scope of the Instrument. It was noted that equity options have a specific margining process where initial margin is collected on a gross basis and there is no netting of opposite positions or resulting margin. The commenters suggest that the level of segregation required under the Proposed Instrument would adversely limit the margin efficiency investors are looking for when using OTC options in parallel with exchange-traded options and will impose a significant burden on equity options market participants that is not imposed in other foreign jurisdictions.
Change made. OTC options on securities are excluded from the scope of application of the Instrument.
One commenter noted that requirements in the Instrument should be applied consistently across all jurisdictions of Canada and harmonized with international regulations.
No change. The Instrument will be consistently applied across Canadian jurisdictions and is largely harmonized with international regulations.
One commenter noted that implementation of the Instrument will require significant technological, operational and rule changes for regulated clearing agencies and requested that appropriate timelines for compliance be provided in the Instrument.
Change made. The Instrument includes an implementation period to provide time for market participants to comply with the Instrument.
Two commenters requested that reporting obligations in the Instrument be revised to minimize duplicative reporting requirements for foreign clearing agencies, such as by accepting the same reports provided to the CFTC or National Futures Association (with information regarding non-Canadian customers removed). One commenter requested that the reporting obligations of clearing agencies be limited to information related to collateral held by Canadian intermediaries.
Change made. An exemption based on substituted compliance is available to regulated clearing agencies that act in accordance with CFTC and EMIR recordkeeping and reporting requirements.
PART 1: DEFINITIONS, INTERPRETATION AND APPLICATION
s. 1 -- Definitions and interpretation
General comments
One commenter requested that the definition of "cleared derivative" be modified to clarify the exclusion of exchange-traded derivatives from the scope of the definition of "cleared derivative" and from the scope of the Instrument as it applies to clearing agencies.
No change. Subsection 1(4) together with the application provisions in subsection 2(2) of the Instrument provide that the Instrument is limited only to the scope of derivatives set out in each local jurisdiction's derivatives product determination rule or regulation (the Product Determination Rules),{1} which exclude exchange-traded derivatives. Subsection 1(4) and Subsection 2(2) apply to the entirety of the Instrument, including the definitions of direct intermediary and indirect intermediary and the other application provisions in section 2. To provide a specific reference to the Product Determination Rules in the definition of "cleared derivative" would be redundant.
"clearing services"
One commenter suggested that the definition may be overly broad and capture activities which should not be regulated as clearing services, such as services provided by introducing brokers that do not hold customer collateral.
No change. The term "clearing services" is not defined in the Instrument. However, guidance applicable to that term is provided in the CP. With respect to intermediaries that provide clearing services, the Instrument applies only to clearing intermediaries that, according to the definitions in the Instrument, require, receive or hold customer collateral.
"customer"
One commenter noted that a clearing agency may have difficulty porting a customer's position and associated collateral where there are several intermediaries between the clearing agency and the customer that is the beneficial owner of the position. The commenter suggested that the definition of customer should be limited in scope to include only direct customers of a direct intermediary (i.e., a customer of a participant of the clearing agency).
No change. Customers that clear indirectly should benefit from the same protections as those that clear directly through a direct intermediary.
"customer collateral"
One commenter requested that the definition of customer collateral distinguish between collateral that is deposited to satisfy margin requirements (i.e., initial margin) and cash or other assets that are paid or deposited to settle the change in price of an open transaction over its settlement cycle (i.e., variation margin). The commenter requested clarification on whether customer initial margin and variation margin must be segregated from the initial margin and variation margin belonging to other customers as well as from house owned initial margin and variation margin.
No change. Initial margin and variation margin must be segregated from a clearing intermediary's house account. Customer collateral is permitted to be held in an omnibus account, provided that the customer collateral for each customer is accounted for separately.
PART 2: TREATMENT OF CUSTOMER COLLATERAL BY A CLEARING INTERMEDIARY
s. 3 -- Segregation of customer collateral -- clearing intermediary
General Comments
One commenter expressed concern regarding the risk associated with perfecting a secured interest in cash collateral posted by a customer to a clearing intermediary. While the commenter supported the changes made to the Instrument, which no longer requires customer collateral to be held in a segregated account linked to the customer's name, the commenter noted the importance of amending the personal property security legislation in Canada to permit perfection by control of a security interest in cash collateral held outside a securities account.
Amendments to the personal property securities legislation are outside the jurisdiction of the CSA. However, amendments were made to the Quebec Civil Code to address this issue and the Committee supports the amendments suggested by the commenter and harmonization of personal property securities legislation across Canada.
s. 5 -- Excess margin -- clearing intermediary
General Comments
One commenter requested that the requirement for clearing service providers to identify and record each business day the value of excess margin under section 5 and section 31 be harmonized with the CFTC's regulations which only require Futures Commission Merchants (FCMs) to calculate excess margin across all customers rather than at the individual customer level.
No change. However, an exemption based on substituted compliance with CFTC and EMIR provisions is available for sections 5 and 31 of the Instrument.
s. 7 -- Investment of customer collateral -- clearing intermediary
General Comments
One commenter noted that United States laws do not require that a repurchase or reverse repurchase agreement in respect of customer collateral invested by a clearing intermediary or regulated clearing agency be confirmed in writing to the customer, contrary to section 7 or section 33, and that such a requirement may be onerous, considering that a customer bears no risk of loss on such agreement.
Change made. To harmonize with similar CFTC requirements, delivery of a written confirmation to the clearing intermediary, rather than to the customer, of the terms of a repurchase or resale transaction involving customer collateral is required in the Instrument. Additionally, the clearing intermediary must disclose to the customer in writing that its customer collateral may be invested or used by the clearing intermediary in accordance with section 7, including disclosure that any losses on the investment or use of the customer collateral will not be allocated to the customer.
PART 3: RECORDKEEPING BY A CLEARING INTERMEDIARY
s. 12 -- Retention of records -- clearing intermediary
General Comments
Commenters requested that the record time for record retention under section 12 and section 36 be reduced to five years.
No change. A seven-year retention period is common practice in Canada and is in line with timing requirements under the Limitations Act, 2002 (Ontario).
Commenters requested that record retention be measured in relation to each individual transaction to harmonize with similar requirements under United States laws. Alternatively, the commenters suggested that recordkeeping requirements be considered for substituted compliance. Clarification of what was meant by keeping records in a readily accessible location was also requested.
Change made. Record retention has been revised to operate on an individual transaction basis. However, general account information must be maintained for at least seven years after the last date upon which a customer's last derivative that is cleared by the clearing intermediary expires or terminates.
s. 13 -- Books and records -- clearing intermediary
General Comments
Commenters suggested that the information required to be recorded about customer collateral held by clearing intermediaries and regulated clearing agencies under section 13 and section 37 is too detailed for the customer segregation regime permitted by the Instrument. A concern was raised that requiring clearing intermediaries and regulated clearing agencies to identify specific items of collateral attributable to each customer may lead customers to believe specific items of collateral are individually segregated for their benefit. Commenters requested that the guidance be revised to only require recording of collateral value.
Change made. The Instrument requires a clearing intermediary or regulated clearing agency to record the value of the customer collateral received from or attributable to a customer.
PART 4: REPORTING AND DISCLOSURE BY A CLEARING INTERMEDIARY
s. 25 -- Customer collateral report -- regulatory
General Comments
Two commenters suggested that the requirement for clearing intermediaries to report posted customer collateral on Forms 94-102F1 and 94-102F2 on an individual customer basis was more burdensome than similar requirements under the CFTC's rules, where reporting on posted customer collateral is only required on an aggregate basis.
Change made. Forms 94-102F1 and 94-102F2 have been revised. A clearing intermediary is now required to report customer collateral on an aggregate basis for all customers, rather than on an individual customer basis. Additionally, a clearing intermediary is now required to report which permitted depositories hold customer collateral on its behalf but is not required to report on the value of customer collateral held at each permitted depository location.
One commenter expressed its support for section 25 to be one of the sections listed in Appendix A for which substituted compliance is available for clearing intermediaries that are in compliance with analogous rules and regulations under the Dodd-Frank Wall Street Reform and Consumer Protection Act (United States).
The reporting required under this section is of importance to Canadian securities regulatory authorities. Consequently, this section remains a residual requirement that is applicable even when substituted compliance is available.
s. 26 -- Customer collateral report -- customer
s.26(1)(b)
Two commenters requested that paragraph 26(1)(b) and paragraph 44(b) be modified to remove references to asset type and quantity of customer collateral to address the concern raised about the level of detail required to be recorded about customer collateral held by clearing intermediaries and regulated clearing agencies under section 13 and section 37.
Change made. Consistent with the changes to sections 13 and 37, the Instrument requires a clearing intermediary or regulated clearing agency to record the value of the customer collateral received from or attributable to a customer.
PART 5: TREATMENT OF CUSTOMER COLLATERAL BY A REGULATED CLEARING AGENCY
General Comments
Commenters suggested that portfolio margining and cross-margining of OTC derivatives with other products such as futures should be permitted under the Instrument because these practices confer commercial benefits for market participants without meaningfully increasing the risk of customer shortfalls in the event of a clearing intermediary's default.
No change. The Instrument prohibits the cross-margining of a customer's OTC cleared derivatives and futures positions. However, in some jurisdictions, customer protection requirements applicable to futures are equivalent to those applicable to OTC cleared derivatives; under such regimes, cross-margining may not represent a material risk to porting a customer's OTC cleared derivatives positions. Therefore, these factors will be taken into account when considering an application for discretionary relief from the prohibition on cross-margining or when making an equivalence determination of a foreign jurisdiction's regulatory requirements for the purpose of substituted compliance.
s. 28 -- Collection of initial margin
General Comments
One commenter noted that a clearing agency's rules do not prescribe the level of margin that its participants must request from its customers. Accordingly, it will not be possible for the clearing agency to monitor whether or not direct intermediaries are offsetting initial margin positions of its customers against one another.
No change. A regulated clearing agency is responsible for ensuring it receives initial margin on a gross basis from each customer.
s. 30 -- Holding of customer collateral -- regulated clearing agency
General Comments
One commenter requested the Instrument explicitly permit commingling and the use of omnibus accounts directly in section 30.
No change. We refer to the guidance in section 30 of the CP, which states that the customer collateral of multiple customers held by a regulated clearing agency may be commingled in an omnibus customer account if the customer collateral is segregated by each customer on a recordkeeping basis. Additionally, the recordkeeping obligations in the Instrument require the regulated clearing agency to identify the value of customer collateral held for each customer within an omnibus account.
s.30(2)
One commenter requested clarification on whether separate accounts are required for each type of customer collateral (e.g., initial margin, variation margin) as well as for any property of the customer held by the regulated clearing agency related to transactions outside of the scope of the Instrument (e.g., exchange-traded derivatives).
Change made. All types of customer collateral can be commingled in an omnibus account with the customer collateral of other customers.
Additionally, guidance has been added to the CP clarifying that a regulated clearing agency is required to hold customer collateral relating to cleared derivatives separately from any other type of property that is not customer collateral, including any other property posted by a customer as collateral relating to another investment or financial instrument that is not a cleared derivative. For example, the customer collateral of a customer may be commingled in an omnibus account with the customer collateral of other customers but may not be commingled with collateral relating to a futures contract that belongs to the customer or another customer.
s. 32 -- Use of customer collateral -- regulated clearing agency
General Comments
Commenters noted that section 32 prevents cross-margining of futures and OTC swaps and requested that cross-margining be permitted where a Canadian counterparty is interacting with a clearing agency in foreign jurisdictions where cross-margining is permitted. It was requested the Committee consider that clearing agencies would need to implement manual controls to prevent Canadian counterparties from accessing cross-margined offerings and that Canadian counterparties would be subject to significantly higher margin requirements if their futures and OTC swaps could not be commingled and cross-margined.
No change. The Instrument prohibits the cross-margining of a customer's OTC cleared derivatives and futures positions. However, in some jurisdictions, customer protection requirements applicable to futures are equivalent to those applicable to OTC cleared derivatives; under such regimes, cross-margining may not represent a material risk to porting a customer's OTC cleared derivatives positions. Therefore, these factors will be taken into account when considering an application for discretionary relief from the prohibition on cross-margining or when making an equivalence determination of a foreign jurisdiction's regulatory requirements for the purpose of substituted compliance.
s. 33 -- Investment of customer collateral -- regulated clearing agency
General Comments
One commenter requested that investment losses be borne solely by the clearing agency. The commenter noted that equivalent provisions in the CFTC regulations do not permit mutualisation of investment losses among clearing agency members and requested clarification on the risk management and policy reasons for permitting mutualisation of investment losses among clearing members.
No change. There is no requirement in section 7 or section 33 that losses be shared among clearing intermediaries.
PART 6: RECORDKEEPING BY A REGULATED CLEARING AGENCY
s. 36 -- Retention of records -- regulated clearing agency
General Comments
Clarification of the scope of records required to be retained by regulated clearing agencies was requested. The commenter suggested that the customer information collected by a clearing intermediary and shared with a regulated clearing agency under section 24 should be retained only by the clearing intermediary in accordance with section 12.
Change made. The Instrument does not require a regulated clearing agency to retain records related to a cleared derivative after the cleared derivative is terminated. Clearing intermediaries are required to maintain records related to customers and individual cleared derivatives for at least 7 years after termination; thus, it would be redundant for both clearing intermediaries and regulated clearing agencies to keep these records for an extended period after termination.
s. 37 -- Books and records -- regulated clearing agency
General Comments
A concern was raised that requiring clearing intermediaries and regulated clearing agencies to identify specific items of collateral attributable to each customer may cause customers to believe specific items of collateral are individually segregated for their benefit.
Change made. The Instrument requires a regulated clearing agency to record the value of the customer collateral received from or attributable to a customer.
s. 38 -- Separate records -- regulated clearing agency
s. 38(b)
One commenter noted that under United States laws, a derivatives clearing organization (DCO) must only record the value of customer collateral held by the DCO in satisfaction of its margin requirements and is not required to record the value of excess margin. The commenter requested that paragraph 38(b) not apply to non-Canadian clearing agencies subject to different regulatory requirements and which have built operation systems accordingly.
Change made. Section 31 of the Instrument has been revised and requires a regulated clearing agency to record the value of excess margin it holds for a clearing intermediary on behalf of its customers.
Additionally, an exemption based on substituted compliance is available to regulated clearing agencies that act in accordance with CFTC or EMIR requirements.
s. 38(b)
One commenter requested that paragraph 38(b) be revised to clarify that clearing agencies are not required to distinguish the value of customer collateral on an individually segregated basis (i.e., it can be recorded within an omnibus customer account).
No change. Customer collateral can be held within an omnibus account but the value of customer collateral attributable to each customer must be recorded.
s. 38(b) and (c)
One commenter requested that to align with the CFTC's approach to the treatment of non-US indirect intermediary's accounts, the Instrument should provide for substituted compliance for paragraphs 38(b) and (c) and clarify that paragraphs 38(b) and (c) apply only to a clearing intermediary in respect of local counterparties (not all of their customers).
Change made. An exemption based on substituted compliance is available to regulated clearing agencies that act in accordance with CFTC or EMIR requirements.
Otherwise, section 2 of the Instrument provides that the requirements under the Instrument are applicable to a regulated clearing agency that has its head office or principal place of business in a foreign jurisdiction only in respect of clearing services provided for local customers (i.e., customers located or organized in Canada). Section 2 also provides that the requirements under the Instrument applicable to clearing intermediaries apply only in respect of clearing services provided to local customers.
PART 7: REPORTING AND DISCLOSURE BY A REGULATED CLEARING AGENCY
s. 41 -- Disclosure to direct intermediaries by regulated clearing agency
General Comments
One commenter requested that for clearing agencies subject to United States laws, substituted compliance be available to permit reliance on the existing disclosures by clearing agencies under Part 39.37 of the CFTC's rules. Additionally, where a clearing agency has already made the disclosures required under the Instrument to a customer, the clearing agency should not be required to make the disclosures again after the Instrument comes into force.
Change made. Substituted compliance applies to clearing intermediaries that provide disclosure in accordance with CFTC and EMIR disclosure requirements. Additionally, the guidance in the CP providing examples of information to be included in the disclosure has been clarified.
As stated in the Notice and in the CP, where a regulated clearing agency or clearing intermediary has previously delivered disclosure to its customers that meets the requirements of the Instrument prior to the entry into force of the Instrument, new disclosure will not need to be provided to those customers.
s. 43 -- Customer collateral report -- regulatory
General Comments
One commenter suggested that the reporting requirements regarding customer collateral for regulated clearing agencies on Form 94-102F3 was more burdensome than similar requirements under the CFTC's rules.
Change made. Form 94-102F3 has been revised and a regulated clearing agency is now required to report customer collateral on an aggregate basis for all customers, rather than on an individual customer basis. Additionally, a regulated clearing agency is now required to report which permitted depositories hold customer collateral on its behalf but is not required to report on the value of customer collateral held at each permitted depository location.
The reporting required under this section is of importance to Canadian securities regulatory authorities. Consequently, this section remains a residual requirement that is applicable even when substituted compliance is available.
PART 8: TRANSFER OF POSITIONS
s. 46 -- Transfer of customer collateral and positions
General Comments
One commenter noted that the contractual obligation between a clearing agency and its direct participant to comply with the rules of the clearing agency does not extend to a customer of the direct participant. Consequently, the clearing agency is not in a position to assess if the direct participant's customer has defaulted on its obligation.
Change made. The CP has been revised at section 24 to explain that the clearing intermediary would be responsible for providing information on customer default.
s. 46(1)
Two commenters requested that subsection 46(1) be modified to include "to the extent practicable" to address explicitly the challenges associated with discharging the obligations created by this provision.
Change made. Section 46 has been revised in the Instrument to address the challenges associated with the obligations created by the provision. These changes include specifying different requirements for transfers of a customer's positions and customer collateral in a default scenario or by request of the customer in a business-as-usual scenario.
s. 46(3)(a)
Two commenters suggested that paragraph 46(3)(a) be revised to reflect the fact that customer consent to transfer collateral and positions will not always be obtained in certain default scenarios which rely on negative consent.
Change made. Regulated clearing agencies are obligated to make reasonable efforts to ensure the transfer of a customer's collateral and positions is facilitated in accordance with the customer's instructions. Guidance on this point has been added to the CP.
PART 9: SUBSTITUTED COMPLIANCE
General Comments
In making its conclusions regarding which provisions in the Instrument will benefit from substituted compliance, one commenter encouraged assessing foreign customer protection rules using an outcomes-based approach, such that foreign rules would qualify for substituted compliance where the same level of overall protection is achieved even if the foreign rules are not exactly the same as the requirements under the Instrument.
Change made. An outcomes-based approach was used to make the substituted compliance determinations included in the Instrument.
Commenters requested that the Instrument permit substituted compliance on a holistic basis whereby the OTC derivatives customer clearing regimes of foreign jurisdictions would be recognized in their entirety. Where certain parts of a foreign jurisdiction's customer clearing regime are insufficient, it was suggested that additional conditions be imposed such that compliance with the Instrument is required for those particular provisions.
Change made. An outcomes-based approach was used to make the substituted compliance determinations included in the Instrument. On an outcomes basis, it was determined that certain provisions in the Instrument did not have equivalent provisions in the customer clearing regimes used in the foreign jurisdictions that we have reviewed. Accordingly, such "residual" provisions must be complied with by foreign clearing intermediaries and regulated clearing agencies providing clearing services for local customers even when benefitting from the exemption based on substituted compliance.
{1} Manitoba Securities Commission Rule 91-506 Derivatives: Product Determination; Ontario Securities Commission Rule 91-506 Derivatives: Product Determination; Québec Regulation 91-506 respecting Derivatives Determination; and Multilateral Instrument 91-101 Derivatives: Product Determination.
List of Commenters:
1. BMO Nesbitt Burns Inc.2. The Canadian Advocacy Council for Canadian CFA Institute Societies3. Canadian Market Infrastructure Committee4. Chicago Mercantile Exchange Inc.5. Futures Industry Association, Inc.6. TMX Group Limited
ANNEX B
NATIONAL INSTRUMENT 94-102 DERIVATIVES: CUSTOMER CLEARING AND PROTECTION OF CUSTOMER COLLATERAL AND POSITIONS
PART 1 DEFINITIONS, INTERPRETATION AND APPLICATION
Definitions and interpretation
1.
(1) In this Instrument
"Canadian financial institution" has the meaning ascribed to it in National Instrument 45-106 Prospectus Exemptions;
"cleared derivative" means a derivative that is, directly or indirectly, submitted to and cleared by a clearing agency;
"clearing intermediary" means a direct intermediary or an indirect intermediary;
"customer" means a counterparty to a cleared derivative other than a clearing intermediary or a regulated clearing agency;
"customer collateral" means all cash, securities and other property if any of the following apply:
(a) the cash, securities or other property is received or held by a clearing intermediary or regulated clearing agency from, for or on behalf of a customer, and is intended to or does margin, guarantee, secure, settle or adjust a cleared derivative of the customer;
(b) the cash, securities or other property is posted on behalf of a customer by a clearing intermediary to satisfy the margin requirements arising from the customer's cleared derivatives;
"direct intermediary" means a person or company that
(a) with respect to a cleared derivative, is a participant of the regulated clearing agency at which the cleared derivative is cleared,
(b) directly provides clearing services for a customer in respect of a cleared derivative entered into by, for or on behalf of the customer, and
(c) requires, receives or holds collateral from, for or on behalf of the customer in providing clearing services;
"excess margin" means customer collateral in respect of a customer's cleared derivatives that
(a) is delivered to a regulated clearing agency or clearing intermediary from, for or on behalf of the customer, and
(b) has a value in excess of the amount required by the regulated clearing agency to clear and settle the cleared derivatives of the customer;
"indirect intermediary" means a person or company that
(a) indirectly provides clearing services for a customer in respect of a cleared derivative entered into by, for or on behalf of the customer, and
(b) requires, receives or holds collateral from, for or on behalf of the customer in providing clearing services;
"initial margin" means, in relation to a regulated clearing agency's margin system that manages credit exposures to its participants, collateral that is required by the regulated clearing agency to cover potential changes in the value of a customer's cleared derivatives over an appropriate close-out period in the event of a default;
"local customer" means a customer that, in respect of a local jurisdiction, is any of the following:
(a) an individual who is resident in the local jurisdiction;
(b) a person or company, other than an individual, to which any of the following apply:
(i) the person or company is organized under the laws of the local jurisdiction;
(ii) the head office of the person or company is in the local jurisdiction;
(iii) the principal place of business of the person or company is in the local jurisdiction;
"participant" means a person or company that has entered into an agreement with a regulated clearing agency to access the services of the regulated clearing agency and is bound by the regulated clearing agency's rules and procedures;
"permitted depository" means a person or company that is any of the following:
(a) a Canadian financial institution or Schedule III bank;
(b) a regulated clearing agency;
(c) the central bank of Canada or of a permitted jurisdiction;
(d) in Québec, a person recognized or exempt from recognition as a central securities depository under the Securities Act (Québec);
(e) a person or company
(i) whose head office or principal place of business is in a permitted jurisdiction,
(ii) that is a banking institution or trust company of a permitted jurisdiction, and
(iii) that has shareholders' equity, as reported in its most recent audited financial statements, of not less than the equivalent of $100 000 000;
(f) with respect to customer collateral that it receives from a customer or a clearing intermediary for which it provides clearing services, a registered investment dealer as defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations;
(g) with respect to customer collateral that it receives from a customer or a clearing intermediary for which it provides clearing services, a prudentially regulated entity
(i) whose head office or principal place of business is located outside of Canada, and
(ii) that is subject to and in compliance with the laws of a permitted jurisdiction relating to clearing services and the requiring, receiving and holding of customer collateral;
"permitted investment" means cash or a security or other financial instrument with minimal market and credit risk that is capable of being liquidated rapidly with minimal adverse price effect;
"permitted jurisdiction" means a foreign jurisdiction that is any of the following:
(a) a country where the head office or principal place of business of a Schedule III bank is located, and a political subdivision of that country;
(b) if a customer has provided express written consent to the clearing intermediary or the regulated clearing agency clearing a cleared derivative in a foreign currency, the country of origin of the foreign currency used to denominate the rights and obligations under the cleared derivative entered into by, for or on behalf of the customer, and a political subdivision of that country;
"position" means the economic interest of a counterparty in an outstanding cleared derivative at a point in time;
"prudentially regulated entity" means a person or company that is subject to and in compliance with the laws of a foreign jurisdiction that is a permitted jurisdiction under paragraph (a) of the definition of "permitted jurisdiction", relating to minimum capital requirements, financial soundness and risk management;
"qualifying central counterparty" means a person or company to which all of the following apply:
(a) it is recognized, exempt from recognition or otherwise registered or authorized to operate as a central counterparty in a jurisdiction of Canada or a foreign jurisdiction by a government or regulatory authority;
(b) it is subject to regulation that is consistent with the Principles for market infrastructures published by the Bank for International Settlements' Committee on Payments and Market Infrastructures and the International Organization of Securities Commissions in April 2012, as amended from time to time;
"regulated clearing agency" means
(a) in British Columbia, Manitoba and Ontario, a person or company recognized or exempt from recognition as a clearing agency in the local jurisdiction, and
(b) in Alberta, Newfoundland and Labrador, New Brunswick, the Northwest Territories, Nova Scotia, Nunavut, Prince Edward Island, Québec, Saskatchewan and Yukon, a person or company recognized or exempt from recognition as a clearing agency or clearing house pursuant to the securities legislation of any jurisdiction of Canada;
"Schedule III bank" means an authorized foreign bank named in Schedule III of the Bank Act (Canada);
"segregate" means to separately hold or separately account for a customer's positions or customer collateral.
(2) In this Instrument, a person or company is an affiliated entity of another person or company if one of them controls the other or each of them is controlled by the same person or company.
(3) In this Instrument, a person or company (the first party) is considered to control another person or company (the second party) if any of the following apply:
(a) the first party beneficially owns or directly or indirectly exercises control or direction over securities of the second party carrying votes which, if exercised, would entitle the first party to elect a majority of the directors of the second party, unless the first party holds the voting securities only to secure an obligation;
(b) the second party is a partnership, other than a limited partnership, and the first party holds more than 50% of the interests of the partnership;
(c) the second party is a limited partnership and the general partner of the limited partnership is the first party;
(d) the second party is a trust and the trustee of the trust is the first party.
(4) In this Instrument, in Alberta, British Columbia, New Brunswick, Newfoundland and Labrador, the Northwest Territories, Nova Scotia, Nunavut, Prince Edward Island, Saskatchewan and Yukon, "derivative" means a "specified derivative" as defined in Multilateral Instrument 91-101 Derivatives: Product Determination.
Application
2.
(1) This Instrument does not apply to any of the following:
(a) a regulated clearing agency whose head office or principal place of business is in a foreign jurisdiction except with respect to a cleared derivative entered into by, for or on behalf of a local customer;
(b) a clearing intermediary that provides clearing services except with respect to a cleared derivative entered into by, for or on behalf of a local customer.
(2) This Instrument applies to
(a) in Manitoba,
(i) a derivative other than a contract or instrument that, for any purpose, is prescribed by any of sections 2, 4 and 5 of Manitoba Securities Commission Rule 91-506 Derivatives: Product Determination not to be a derivative, and
(ii) a derivative that is otherwise a security and that, for any purpose, is prescribed by section 3 of Manitoba Securities Commission Rule 91-506 Derivatives: Product Determination not to be a security,
(b) in Ontario,
(i) a derivative other than a contract or instrument that, for any purpose, is prescribed by any of sections 2, 4 and 5 of Ontario Securities Commission Rule 91-506 Derivatives: Product Determination not to be a derivative, and
(ii) a derivative that is otherwise a security and that, for any purpose, is prescribed by section 3 of Ontario Securities Commission Rule 91-506 Derivatives: Product Determination not to be a security, and
(c) in Québec, a derivative specified in section 1.2 of Regulation 91-506 respecting derivatives determination, other than a contract or instrument specified in section 2 of that regulation.
- - - - - - - - - - - - - - - - - - - -
In each other local jurisdiction, this Instrument applies to a derivative as defined in subsection 1(4) of this Instrument. This text box does not form part of this Instrument and has no official status.
- - - - - - - - - - - - - - - - - - - -
(3) Despite subsection (2), this Instrument does not apply to an option on a security.
(4) In British Columbia, Newfoundland and Labrador, the Northwest Territories, Nunavut, Prince Edward Island and Yukon, subsection (3) does not apply to a security that is a derivative as defined in subsection 1(4).
PART 2 TREATMENT OF CUSTOMER COLLATERAL BY A CLEARING INTERMEDIARY
Segregation of customer collateral -- clearing intermediary
3.
(1) A clearing intermediary must segregate a customer's positions and customer collateral from the positions and property of other persons or companies including the positions and property of the clearing intermediary.
(2) A clearing intermediary must segregate the positions and customer collateral of a customer of an indirect intermediary from the positions and property of the indirect intermediary.
Holding of customer collateral -- clearing intermediary
4. A clearing intermediary must hold all customer collateral
(a) in one or more accounts at a permitted depository that are clearly identified as holding customer collateral, and
(b) in separate accounts from the property of all persons who are not customers.
Excess margin -- clearing intermediary
5. A clearing intermediary must at least once each business day identify and record the value of excess margin it holds that is attributable to each customer for which the clearing intermediary provides clearing services.
Use of customer collateral -- clearing intermediary
6.
(1) A clearing intermediary must not use or permit the use of customer collateral except in accordance with this section and sections 7 and 8.
(2) A clearing intermediary must not use or permit the use of customer collateral of a customer except to do any of the following:
(a) margin, guarantee, secure, settle or adjust a cleared derivative of the customer;
(b) with respect to excess margin, guarantee, secure or extend the credit of the customer.
(3) Other than with respect to excess margin used in accordance with paragraph (2)(b), a clearing intermediary must not create or permit to exist any lien or other encumbrance on a cleared derivative of a customer or customer collateral in respect of the cleared derivative unless the lien or other encumbrance secures an obligation resulting from the cleared derivative in favour of any of the following:
(a) the customer;
(b) the regulated clearing agency or clearing intermediary responsible for clearing the cleared derivative.
Investment of customer collateral -- clearing intermediary
7.
(1) A clearing intermediary must not invest customer collateral or enter into an agreement for resale or repurchase of customer collateral except in accordance with subsections (2) and (3).
(2) A clearing intermediary may
(a) invest customer collateral in a permitted investment, and
(b) enter into an agreement for resale or repurchase of customer collateral if all of the following apply:
(i) the agreement is for the resale or repurchase of a permitted investment;
(ii) the agreement is in writing;
(iii) the term of the agreement is no more than one business day, or reversal of the transaction is possible on demand;
(iv) written confirmation specifying the terms of the agreement is delivered by the counterparty to the agreement to te clearing intermediary immediately on entering into the agreement;
(v) the agreement is not entered into with an affiliated entity of the clearing intermediary.
(3) A loss resulting from an investment or use of a customer's customer collateral in accordance with subsection (1) or subsection (2) by the clearing intermediary must be borne by the clearing intermediary making the investment and not by the customer.
Use of customer collateral -- indirect intermediary default
8.
(1) A clearing intermediary must not use customer collateral of a customer of an indirect intermediary for which the clearing intermediary provides clearing services to satisfy an obligation of the indirect intermediary.
(2) Despite subsection (1), a clearing intermediary may use the customer collateral of a customer to fully or partially satisfy an obligation of an indirect intermediary that arises or is accelerated as a consequence of the indirect intermediary's default only if the obligation is attributable to a cleared derivative of the customer.
Acting as a clearing intermediary
9.
(1) A person or company must not act as a clearing intermediary for a customer unless the person or company is any of the following:
(a) a person or company that is subject to and is in compliance with the laws of a jurisdiction of Canada relating to minimum capital requirements, financial soundness and risk management;
(b) a person or company that is registered as a dealer under securities legislation in a local jurisdiction;
(c) a person or company that is
(i) a prudentially regulated entity, and
(ii) subject to and in compliance with the laws of a permitted jurisdiction relating to clearing services and the requiring, receiving and holding of customer collateral.
(2) A clearing intermediary must not provide clearing services for a customer unless the clearing services are provided in respect of derivatives that are cleared by a regulated clearing agency.
Risk management -- clearing intermediary
10. A clearing intermediary that provides or proposes to provide clearing services for an indirect intermediary must adopt and implement rules, policies or procedures reasonably designed to
(a) identify, monitor and reasonably mitigate material risks arising from the provision of clearing services, and
(b) manage a default of the indirect intermediary.
Risk management -- indirect intermediary
11.
(1) An indirect intermediary must establish and implement rules, policies or procedures reasonably designed to identify, monitor and reasonably mitigate the material risks to the clearing intermediary or its customers arising from the provision of indirect clearing services for a customer.
(2) An indirect intermediary that receives clearing services from a clearing intermediary must provide the clearing intermediary with all information reasonably required to identify, monitor and reasonably mitigate any material risks arising from the provision of indirect clearing services for customers.
PART 3 RECORDKEEPING BY A CLEARING INTERMEDIARY
Retention of records -- clearing intermediary
12.
(1) A clearing intermediary must keep a record required under this Part and Part 4, and all supporting documentation,
(a) in a readily accessible and safe location and in a durable form,
(b) in the case of a record or supporting documentation that relates to a cleared derivative, for a period of 7 years following the date on which the cleared derivative expires or is terminated, and
(c) in any other case, for a period of 7 years following the date on which a customer's last cleared derivative that is cleared for or on behalf of the customer through the clearing intermediary expires or is terminated.
(2) Despite subsection (1), in Manitoba with respect to a customer or clearing intermediary located in Manitoba, the time period applicable to records and supporting documentation kept pursuant to subsection (1) is 8 years.
Daily records -- clearing intermediary
13.
(1) A clearing intermediary that receives customer collateral must calculate and record all of the following at least once each business day in its records:
(a) for each customer, the amount of customer collateral it requires from, for or on behalf of the customer;
(b) the total amount of customer collateral it requires from, for or on behalf of all customers.
(2) For each indirect intermediary that a clearing intermediary provides clearing services for, the clearing intermediary must calculate and record all of the following at least once each business day in its records:
(a) the amount of customer collateral it requires from, for or on behalf of each customer of each indirect intermediary;
(b) the total amount of customer collateral it requires from, for or on behalf of all customers of each indirect intermediary.
(3) For each customer, a clearing intermediary must record all of the following in its records:
(a) each permitted depository at which it holds customer collateral of the customer;
(b) calculated at least once each business day, the current value of any customer collateral received from, for or on behalf of the customer, including all of the following:
(i) any accruals on the customer collateral creditable to the customer;
(ii) any gains or losses in respect of the customer collateral;
(iii) any charges accruing to the customer;
(iv) any distributions or transfers of the customer collateral.
Daily records -- direct intermediary
14. For each customer, a direct intermediary must record all of the following at least once each business day in its records:
(a) the total amount of customer collateral required for the cleared derivatives of the customer by each regulated clearing agency;
(b) the total amount of the customer's excess margin held by the direct intermediary.
Daily records -- indirect intermediary
15. For each customer, an indirect intermediary must record all of the following at least once each business day in its records:
(a) the total amount of collateral required for the cleared derivatives of the customer by each clearing intermediary through which the indirect intermediary clears;
(b) the sum of the amounts for the customer referred to in paragraph (a);
(c) the total amount of the customer's excess margin held by the indirec intermediary.
Identifying records -- direct intermediary
16. A direct intermediary must keep records that, at any time, enable it to identify all of the following in its own accounts and in the accounts held with each regulated clearing agency through which it provides clearing services:
(a) the positions and property of the direct intermediary;
(b) the positions and value of customer collateral held for or on behalf of each of the direct intermediary's customers.
Identifying records -- indirect intermediary
17. An indirect intermediary must keep records that, at any time, enable it to identify all of the following in its own accounts and in the accounts held with each clearing intermediary through which it provides clearing services:
(a) the positions and property of the indirect intermediary;
(b) the positions and value of customer collateral held for or on behalf of each of the indirect intermediary's customers.
Identifying records -- multiple clearing intermediaries
18. A clearing intermediary that provides clearing services in respect of a cleared derivative for an indirect intermediary must keep records that, at any time, enable it and each of its indirect intermediaries to identify all of the following in the accounts held with the clearing intermediary:
(a) the positions and property of the indirect intermediary;
(b) the positions and value of customer collateral held for or on behalf of the indirect intermediary's customers.
Records of investment of customer collateral -- clearing intermediary
19. A clearing intermediary that invests customer collateral must keep records of all of the following with respect to each investment of customer collateral:
(a) the date of the investment;
(b) the name of each person or company through which the investment was made;
(c) a daily market valuation of the investment, including any unrealized gain or loss on the investment and related supporting documentation;
(d) a description of each asset or instrument in which the investment was made;
(e) the identity of each permitted depository where each asset or instrument in which the investment was made is deposited;
(f) the date on which the investment was liquidated or otherwise disposed of and the realized gain or loss;
(g) the name of each person or company liquidating or disposing of the investment.
Records of currency conversion -- clearing intermediary
20. A clearing intermediary must keep a record of each conversion of customer collateral from one currency to another.
PART 4 REPORTING AND DISCLOSURE BY A CLEARING INTERMEDIARY
Clearing intermediary delivery of disclosure by regulated clearing agency
21.
(1) Before receiving the first cleared derivative from, for or on behalf of a customer, a clearing intermediary must provide the customer, or an indirect intermediary for which it provides clearing services, with all of the following:
(a) the written disclosure provided under subsection 41(1) by each regulated clearing agency the direct intermediary uses to clear a cleared derivative for the customer or indirect intermediary;
(b) the investment guidelines and policy provided under subsection 45(1) by each regulated clearing agency that invests customer collateral attributable to the customer.
(2) After accepting the first cleared derivative from, for or on behalf of a customer, each time that the clearing intermediary receives written disclosure in accordance with subsection 41(2) or subsection 45(2) from a regulated clearing agency that invests customer collateral attributable to the customer, the clearing intermediary must provide the written disclosure to the customer, or indirect clearing intermediary for which it provides clearing services, within a reasonable period of time.
Disclosure to customer by clearing intermediary
22.
(1) Before receiving the first cleared derivative from, for or on behalf of a customer, a clearing intermediary must provide written disclosure to the customer describing the treatment of customer collateral not held at a regulated clearing agency, including the impact of relevant bankruptcy and insolvency laws, in the event of a default by the clearing intermediary.
(2) After accepting the first cleared derivative from, for or on behalf of a customer of, each time there is a change to the written disclosure referred to in subsection (1), the clearing intermediary must provide written disclosure to the customer, within a reasonable period of time, describing the change.
Disclosure to customer by indirect intermediary
23.
(1) Before receiving the first cleared derivative from, for or on behalf of a customer, an indirect intermediary must provide written disclosure to the customer including a description of all of the following:
(a) the material risks associated with receiving clearing services through an indirect intermediary;
(b) the rules, policies or procedures for transferring positions and customer collateral to another clearing intermediary or liquidating positions and customer collateral, in the event of the indirect intermediary's default.
(2) After accepting the first cleared derivative from, for or on behalf of a customer of, each time there is a change to the rules, policies or procedures referred to in paragraph (1)(b), the indirect intermediary must provide written disclosure to the customer, within a reasonable period of time, describing the change.
Customer information -- clearing intermediary
24.
(1) A direct intermediary must provide all of the following to a regulated clearing agency:
(a) before submitting to the regulated clearing agency the first cleared derivative for or on behalf of a customer of the direct intermediary, or of an indirect intermediary for which the direct intermediary provides clearing services, information sufficient to identify the customer and the customer's positions and customer collateral;
(b) at least once each business day after providing the information referred to in paragraph (a), information that identifies the customer's positions and the current value of the customer's customer collateral.
(2) An indirect intermediary must provide all of the following to a clearing intermediary through which it provides clearing services:
(a) before submitting to the clearing intermediary the first cleared derivative for or on behalf of a customer, information sufficient to identify the customer and the customer's positions and customer collateral;
(b) at least once each business day after providing the information referred to in paragraph (a), information that identifies the customer's positions and the current value of the customer's customer collateral.
Customer collateral report -- regulatory
25.
(1) A direct intermediary that receives customer collateral must electronically deliver to the regulator or securities regulatory authority, within 10 business days of the end of each calendar month, a completed Form 94-102F1 Customer Collateral Report: Direct Intermediary.
(2) An indirect intermediary that receives customer collateral must electronically deliver to the regulator or securities regulatory authority, within 10 business days of the end of each calendar month, a completed Form 94-102F2 Customer Collateral Report: Indirect Intermediary.
Customer collateral report -- customer
26.
(1) A clearing intermediary must make available to each customer from, for or on behalf of whom it receives customer collateral, a report, calculated and available on a daily basis, setting out all of the following:
(a) the current value of each position of the customer;
(b) the current value of customer collateral received from, for or on behalf of the customer that is held by the clearing intermediary or at a permitted depository;
(c) the current value of the customer collateral received from, for or on behalf of the customer that is posted with any of the following:
(i) a regulated clearing agency;
(ii) another clearing intermediary.
(2) A clearing intermediary must make available to each indirect intermediary from which it receives customer collateral a report, calculated and available on a daily basis, setting out all of the following:
(a) the current value of each position of each customer of the indirect intermediary;
(b) the current value of customer collateral received from the indirect intermediary for or on behalf of each customer of the indirect intermediary that is held by the clearing intermediary or at a permitted depository;
(c) the current value of the customer collateral received from the indirect intermediary for or on behalf of each customer of the indirect intermediary that is posted with any of the following:
(i) a regulated clearing agency;
(ii) another clearing intermediary.
Disclosure of investment of customer collateral
27.
(1) Before receiving the first cleared derivative from, for or on behalf of a customer, a clearing intermediary that invests customer collateral must disclose in writing its investment guidelines and policy directly to the customer, or, if applicable, to the indirect intermediary that is providing clearing services to the customer.
(2) A clearing intermediary that invests customer collateral must within a reasonable period of time disclose in writing any change to the investment guidelines and policy referred to in subsection (1) directly to the customer or, if applicable, to the indirect intermediary that is providing clearing services to the customer.
PART 5 TREATMENT OF CUSTOMER COLLATERAL BY A REGULATED CLEARING AGENCY
Collection of initial margin
28. A regulated clearing agency must collect initial margin for each customer on a gross basis.
Segregation of customer collateral -- regulated clearing agency
29. A regulated clearing agency must segregate a customer's positions and customer collateral from the positions and property of other persons or companies including the positions and property of the regulated clearing agency.
Holding of customer collateral -- regulated clearing agency
30. A regulated clearing agency must hold all customer collateral
(a) in one or more accounts at a permitted depository that are clearly identified as holding customer collateral, and
(b) in separate accounts from all other property that is not customer collateral.
Excess margin -- regulated clearing agency
31. A regulated clearing agency must at least once each business day identify and record the value of excess margin it holds for or on behalf of the customers of each clearing intermediary.
Use of customer collateral -- regulated clearing agency
32.
(1) A regulated clearing agency must not use or permit the use of customer collateral except in accordance with this section and sections 33 and 34.
(2) A regulated clearing agency must not use or permit the use of customer collateral of a customer except to do any of the following:
(a) margin, guarantee, secure, settle or adjust a cleared derivative of the customer;
(b) with respect to excess margin, guarantee, secure or extend the credit of the customer.
(3) Other than with respect to excess margin used in accordance with paragraph (2)(b), a regulated clearing agency must not create or permit to exist any lien or other encumbrance on a cleared derivative of a customer or customer collateral in respect of the cleared derivative unless the lien or other encumbrance secures an obligation resulting from the cleared derivative in favour of any of the following:
(a) the customer;
(b) the regulated clearing agency or a clearing intermediary responsible for clearing the cleared derivative.
Investment of customer collateral -- regulated clearing agency
33.
(1) A regulated clearing agency must not invest customer collateral or enter into an agreement for resale or repurchase of customer collateral except in accordance with subsections (2) and (3).
(2) A regulated clearing agency may
(a) invest customer collateral in a permitted investment, and
(b) enter into an agreement for resale or repurchase of customer collateral if all of the following apply:
(i) the agreement is for resale or repurchase of a permitted investment;
(ii) the agreement is in writing;
(iii) the term of the agreement is no more than one business day, or reversal of the transaction is possible on demand;
(iv) written confirmation specifying the terms of the agreement is delivered by the counterparty to the agreement to the regulated clearing agency immediately on entering into the agreement;
(v) the agreement is not entered into with an affiliated entity of the regulated clearing agency.
(3) A loss resulting from an investment or use of a customer's customer collateral in accordance with subsection (1) or subsection (2) by the regulated clearing agency must be borne by the regulated clearing agency making the investment or by a clearing intermediary that is a participant of the regulated clearing agency and not by any customer.
Use of customer collateral -- clearing intermediary default
34.
(1) A regulated clearing agency must not use customer collateral to satisfy an obligation of a clearing intermediary to which the regulated clearing agency provides clearing services.
(2) Despite subsection (1), a regulated clearing agency may use the customer collateral of a customer to fully or partially satisfy an obligation of a clearing intermediary that arises or is accelerated as a consequence of the clearing intermediary's default only if the obligation is attributable to a cleared derivative of the customer.
Risk management -- NI 24-102 applies
35. Part 3 of National Instrument 24-102 Clearing Agency Requirements applies to a regulated clearing agency and, for that purpose, a reference in that instrument to a "recognized clearing agency" is to be read as a reference to a "regulated clearing agency".
PART 6 RECORDKEEPING BY A REGULATED CLEARING AGENCY
Retention of records -- regulated clearing agency
36. A regulated clearing agency must keep a record required under this Part and Part 7, and all supporting documentation, in a readily accessible and safe location and in a durable form, until the date on which the cleared derivative that the record or supporting documentation relates to expires or is terminated.
Daily records -- regulated clearing agency
37.
(1) A regulated clearing agency that receives customer collateral must calculate and record all of the following at least once each business day in its records:
(a) for each customer, the amount of customer collateral it requires from, for or on behalf of the customer;
(b) the total amount of customer collateral it requires from, for or on behalf of all customers.
(2) A regulated clearing agency must record all of the following in its records:
(a) each permitted depository at which it holds customer collateral;
(b) calculated at least once each business day, the current value of the customer collateral received from, for or on behalf of the customers of each direct intermediary including all of the following:
(i) any accruals on the customer collateral creditable to the direct intermediary's customers;
(ii) any gains or losses in respect of the customer collateral;
(iii) any charges accruing to the direct intermediary's customers;
(iv) any distributions or transfers of the customer collateral.
Identifying records -- regulated clearing agency
38. A regulated clearing agency must keep records that, at any time, enable it and each of its direct intermediaries to identify all of the following in the accounts held at the regulated clearing agency:
(a) the positions and property held for the direct intermediary;
(b) the positions and value of customer collateral held for or on behalf of the direct intermediary's customers;
(c) the positions and value of customer collateral held for or on behalf of customers of each indirect intermediary for which the direct intermediary provides clearing services.
Records of investment of customer collateral -- regulated clearing agency
39. A regulated clearing agency that invests customer collateral must keep records of all of the following with respect to each investment of customer collateral:
(a) the date of the investment;
(b) the name of each person or company through which the investment was made;
(c) a daily market valuation of the investment, including any unrealized gain or loss on the investment and related supporting documentation;
(d) a description of each asset or instrument in which the investment was made;
(e) the identity of each permitted depository where each asset or instrument in which the investment is made is deposited;
(f) the date on which the investment was liquidated or otherwise disposed of and the realized gain or loss;
(g) the name of each person or company liquidating or disposing of the investment.
Records of currency conversion -- regulated clearing agency
40. A regulated clearing agency must keep a record of each conversion of customer collateral from one currency to another.
PART 7 REPORTING AND DISCLOSURE BY A REGULATED CLEARING AGENCY
Disclosure to direct intermediaries by regulated clearing agency
41.
(1) Before receiving the first cleared derivative from, for or on behalf of a customer, a regulated clearing agency must provide written disclosure to the direct intermediary through which the derivative is cleared including a description of all of the following:
(a) the rules, policies or procedures of the regulated clearing agency that govern the segregation and use of customer collateral and the transfer or liquidation of a cleared derivative of a customer in the event of a direct intermediary's default;
(b) the impact of laws, including bankruptcy and insolvency laws, on the customer, its positions and customer collateral in the event of a direct intermediary's default;
(c) the circumstances under which an interest or ownership rights in customer collateral may be enforced by the regulated clearing agency, the direct intermediary or the customer.
(2) After accepting the first cleared derivative from, for or on behalf of a customer, each time there is a change to the rules, policies or procedures referred to in paragraph (1)(a), the regulated clearing agency must provide written disclosure to the direct intermediary through which the derivative is cleared, within a reasonable period of time, describing the change.
Customer information -- regulated clearing agency
42. A regulated clearing agency must have rules, policies or procedures reasonably designed to confirm that the information it receives from a direct intermediary in accordance with subsection 24(1) is complete and received in a timely manner.
Customer collateral report -- regulatory
43. A regulated clearing agency that receives customer collateral must electronically deliver to the regulator or securities regulatory authority, within 10 business days of the end of each calendar month, a completed Form 94-102F3 Customer Collateral Report: Regulated Clearing Agency.
Customer collateral report -- direct intermediary
44. A regulated clearing agency must make available to each direct intermediary from which it receives customer collateral a report, calculated and available on a daily basis, setting out all of the following:
(a) the current value of each position of each customer of the direct intermediary;
(b) the current value of customer collateral received from the direct intermediary for or on behalf of each customer of the direct intermediary that is held by the regulated clearing agency;
(c) the total current value of customer collateral received from the direct intermediary that is held at a permitted depository;
(d) the location of each permitted depository at which the customer collateral is held.
Disclosure of investment of customer collateral
45.
(1) Before receiving the first cleared derivative from, for or on behalf of a customer, a regulated clearing agency that invests customer collateral must disclose in writing its investment guidelines and policy to the direct intermediary through which the derivative is cleared.
(2) A regulated clearing agency that invests customer collateral must within a reasonable period of time disclose in writing any change to the investment guidelines and policy referred to in subsection (1) to the direct intermediary through which the derivative is cleared.
PART 8 TRANSFER OF POSITIONS
Transfer of customer collateral and positions
46.
(1)On default of a direct intermediary, a regulated clearing agency and the defaulting direct intermediary must do all of the following:
(a) facilitate a transfer of the defaulting direct intermediary's customers' positions and customer collateral, or their liquidation proceeds, from the defaulting direct intermediary to one or more non-defaulting direct intermediaries;
(b) make reasonable efforts to ensure the transfer is facilitated in accordance with the customer's instructions.
(2) At the request of a customer, a regulated clearing agency and a non-defaulting direct intermediary must facilitate a transfer of the customer's positions and customer collateral from the non-defaulting direct intermediary to one or more non-defaulting direct intermediaries if all of the following apply:
(a) the customer has consented to the transfer;
(b) the customer's account is not currently in default;
(c) the transferred positions will have appropriate margin at the receiving direct intermediary;
(d) any remaining positions will have appropriate margin at the transferring direct intermediary;
(e) the receiving direct intermediary has consented to the transfer.
Transfer from a clearing intermediary
47. A clearing intermediary that provides clearing services for an indirect intermediary must have rules, policies or procedures in respect of the portability and transfer of a customer's positions and customer collateral that include a reasonable mechanism for transferring the positions and customer collateral of the indirect intermediary's customers, in the event of a default by the indirect intermediary or at the request of the indirect intermediary's customer, to one or more non-defaulting clearing intermediaries.
PART 9 SUBSTITUTED COMPLIANCE
Substituted compliance
48.
(1) A clearing intermediary whose head office or principal place of business is in a foreign jurisdiction is exempt from this Instrument in respect of a cleared derivative entered into by, for or on behalf of a local customer if all of the following apply:
(a) the cleared derivative is cleared for or on behalf of a local customer
(i) in a local jurisdiction other than British Columbia, Manitoba and Ontario by a qualifying central counterparty or a regulated clearing agency, and
(ii) in British Columbia, Manitoba and Ontario, by a regulated clearing agency;
(b) the clearing intermediary is all of the following:
(i) registered, licensed or otherwise authorized to perform the services of a clearing intermediary in a foreign jurisdiction listed in Appendix A;
(ii) in compliance with the laws of the foreign jurisdiction applicable to the clearing intermediary set out in Appendix A opposite the name of the foreign jurisdiction relating to clearing services and the requiring, receiving and holding of customer collateral.
(2) Despite subsection (1), a clearing intermediary relying on the exemption from the Instrument set out in subsection (1) that provides clearing services in respect of a cleared derivative entered into by, for or on behalf of a local customer must comply with the provisions of this Instrument set out in Appendix A opposite the name of the foreign jurisdiction referred to in paragraph (1)(b).
(3) A regulated clearing agency whose head office or principal place of business is in a foreign jurisdiction is exempt from this Instrument in respect of a cleared derivative entered into by, for or on behalf of a local customer if the regulated clearing agency complies with all of the following:
(a) the terms and conditions of any recognition or exemption decision made by any securities regulatory authority in respect of the regulated clearing agency;
(b) the laws of a foreign jurisdiction applicable to the regulated clearing agency set out in Appendix A opposite the name of the foreign jurisdiction relating to clearing services and the requiring, receiving and holding of customer collateral.
(4) Despite subsection (3), a regulated clearing agency relying on the exemption from the Instrument set out in subsection (3) that provides clearing services in respect of a cleared derivative entered into by, for or on behalf of a local customer must comply with the provisions of this Instrument set out in Appendix A opposite the name of the foreign jurisdiction referred to in paragraph (3)(b).
PART 10 EXEMPTIONS
Exemption -- general
49.
(1) The regulator or the securities regulatory authority may grant an exemption from this Instrument, in whole or in part, subject to such conditions or restrictions as may be imposed in the exemption.
(2) Despite subsection (1), in Ontario, only the regulator may grant an exemption.
(3) Except in Alberta and Ontario, an exemption referred to in subsection (1) is granted under the statute referred to in Appendix B of National Instrument 14-101 Definitions opposite the name of the local jurisdiction.
PART 11 EFFECTIVE DATE
Effective date
50. This Instrument comes into force on July 3, 2017.
APPENDIX A TO NATIONAL INSTRUMENT 94-102 DERIVATIVES: CUSTOMER CLEARING AND PROTECTION OF CUSTOMER POSITIONS AND COLLATERAL
Substituted Compliance (Section 48)
PART A LAWS, REGULATIONS OR INSTRUMENTS OF FOREIGN JURISDICTIONS APPLICABLE TO CLEARING INTERMEDIARIES FOR SUBSTITUTED COMPLIANCE
Foreign Jurisdiction
Laws, Regulations or Instruments
Provisions of this Instrument applicable to a clearing intermediary despite compliance with the foreign jurisdiction's laws, regulations or instruments
European Union
Regulation (EU) 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories, as amended by Regulation (EU) 600/2014 of 15 May 2014 on markets in financial instruments and amending Regulation (EU) No 648/2012.
Subsection 6(2)
Subsection 6(3)
Section 12
Section 25
Section 26
Commission Delegated Regulation (EU) 149/2013 of 19 December 2012 supplementing Regulation (EU) No 648/2012 of the European Parliament and of the Council with regard to regulatory technical standards on indirect clearing arrangements, the clearing obligation, the public register, access to a trading venue, non-financial counterparties, and risk mitigation techniques for OTC derivatives contracts not cleared by a CCP.
Directive (EU) 39/2004 of 21 April 2004 on markets in financial instruments amending Council Directives 85/611/EEC and 93/6/EEC and Directive 2000/12/EC of the European Parliament and of the Council and repealing Council Directive 93/22/EEC.
United States of America
Commodity Futures Trading Commission, General Regulations Under the Commodity Exchange Act, 17 CFR pt 1.
Section 12
Section 25
Section 26
Commodity Futures Trading Commission, Registration, 17 CFR pt 3.
Commodity Futures Trading Commission, Cleared Swaps, 17 CFR pt 22.
Commodity Futures Trading Commission, Bankruptcy Rules, 17 CFR pt 190.
PART B LAWS, REGULATIONS OR INSTRUMENTS OF FOREIGN JURISDICTIONS APPLICABLE TO REGULATED CLEARING AGENCIES FOR SUBSTITUTED COMPLIANCE
Foreign Jurisdiction
Laws, Regulations or Instruments
Provisions of this Instrument applicable to a regulated clearing agency despite compliance with the foreign jurisdiction's laws, regulations or instruments
European Union
Regulation (EU) 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories, as amended by Regulation (EU) 600/2014 of 15 May 2014 on markets in financial instruments and amending Regulation (EU) No 648/2012.
Section 28
Section 32(2)
Section 32(3)
Section 36
Section 43
Section 44
Commission Delegated Regulation (EU) 149/2013 of 19 December 2012 supplementing Regulation (EU) No 648/2012 of the European Parliament and of the Council with regard to regulatory technical standards on indirect clearing arrangements, the clearing obligation, the public register, access to a trading venue, non-financial counterparties, and risk mitigation techniques for OTC derivatives contracts not cleared by a CCP.
Commission Delegated Regulation (EU) No 153/2013 of 19 December 2012 supplementing Regulation (EU) No 648/2012 of the European Parliament and of the Council with regard to regulatory technical standards on requirements for central counterparties, as amended by Commission Delegated Regulation (EU) 822/2016 of 21 April 2016 amending Delegated Regulation (EU) No 153/2013 as regards the time horizons for the liquidation period to be considered for the different classes of financial instruments.
Directive (EU) 39/2004 of 21 April 2004 on markets in financial instruments amending Council Directives 85/611/EEC and 93/6/EEC and Directive 2000/12/EC of the European Parliament and of the Council and repealing Council Directive 93/22/EEC.
United States of America
Commodity Futures Trading Commission, General Regulations Under the Commodity Exchange Act, 17 CFR pt 1.
Section 36
Section 43
Section 44
Commodity Futures Trading Commission, Cleared Swaps, 17 CFR pt 22.
Commodity Futures Trading Commission, Derivatives Clearing Organizations, 17 CFR pt 39.
Commodity Futures Trading Commission, Provisions Common to Registered Entities, 17 CFR pt 40.
Commodity Futures Trading Commission, Swap Data Recordkeeping and Reporting Requirements, 17 CFR pt 45.
Commodity Futures Trading Commission, Bankruptcy Rules, 17 CFR pt 190.
FORM 94-102F1 CUSTOMER COLLATERAL REPORT: DIRECT INTERMEDIARY
FORM 94-102F2 CUSTOMER COLLATERAL REPORT: INDIRECT INTERMEDIARY
FORM 94-102F3 CUSTOMER COLLATERAL REPORT: REGULATED CLEARING AGENCY
ANNEX C
COMPANION POLICY 94-102 DERIVATIVES: CUSTOMER CLEARING AND PROTECTION OF CUSTOMER COLLATERAL AND POSITIONS
TABLE OF CONTENTS
PART
TITLE
PART 1
GENERAL COMMENTS
PART 2
TREATMENT OF CUSTOMER COLLATERAL BY A CLEARING INTERMEDIARY
PART 3
RECORDKEEPING BY A CLEARING INTERMEDIARY
PART 4
REPORTING AND DISCLOSURE BY A CLEARING INTERMEDIARY
PART 5
TREATMENT OF COLLATERAL BY A REGULATED CLEARING AGENCY
PART 6
RECORDKEEPING BY A REGULATED CLEARING AGENCY
PART 7
REPORTING AND DISCLOSURE BY A REGULATED CLEARING AGENCY
PART 8
TRANSFER OF POSITIONS
PART 9
SUBSTITUTED COMPLIANCE
PART 1 GENERAL COMMENTS
Introduction
This Companion Policy ("CP") sets out the views of the Canadian Securities Administrators (the "CSA" or "we") on various matters relating to National Instrument 94-102 Derivatives: Customer Clearing and Protection of Customer Collateral and Positions (the "Instrument") and related securities legislation.
Other than this Part, the numbering of Parts, sections, subsections, paragraphs and subparagraphs in this CP generally corresponds to the numbering in the Instrument. Any general guidance for a Part appears immediately after the Part's name. Any specific guidance on a section, subsection, paragraph or subparagraph in the Instrument follows any general guidance. If there is no guidance for a Part, section, subsection paragraph or subparagraph, the numbering in this CP will skip to the next provision that does have guidance.
Unless otherwise stated, any reference to a Part, section, subsection, paragraph, subparagraph or definition in this CP is a reference to the corresponding Part, section, subsection, paragraph, subparagraph or definition in the Instrument.
Definitions and interpretation
Unless defined in the Instrument, terms used in the Instrument and in this CP have the meaning given to them in securities legislation. including National Instrument 14-101 Definitions.
Interpretation of terms used in the Instrument and in this CP
A number of key terms are used in the Instrument and this CP, including the terms that follow.
• "Clearing services" refers to acts in furtherance of the clearing of a customer's derivatives. This includes, among other things: submitting the customer's derivatives and associated collateral to a regulated clearing agency for clearing; monitoring and maintaining collateral requirements from the regulated clearing agency on behalf of a customer, including those for initial and variation margin; monitoring and maintaining excess collateral; recording and monitoring cleared positions, collateral received and valuations of both; and monitoring credit and liquidity limits.
• Clearing services also include services provided from one clearing intermediary to another in furtherance of clearing a customer's derivatives. For example, a direct intermediary would be providing clearing services to an indirect intermediary where it accepts a customer's derivatives that were originally submitted by a customer to the indirect intermediary and submits it to a regulated clearing agency.
• "Global Legal Entity Identifier System" means the system for unique identification of parties to financial transactions developed by the Legal Entity Identifier Regulatory Oversight Committee.
• "Legal Entity Identifier Regulatory Oversight Committee" means the international working group established by the finance ministers and the central bank governors of the Group of Twenty nations and the Financial Stability Board, under the Charter of the Regulatory Oversight Committee for the Global Legal Entity Identifier System dated November 5, 2012.
• The term "lien" refers to a creditor's claim against property to secure repayment of a debt.
• "PFMI Report" means the April 2012 final report entitled Principles for financial market infrastructures published by the Bank for International Settlements' Committee on Payments and Market Infrastructure (formerly the Committee on Payment and Settlement Systems) and the Technical Committee of the International Organization of Securities Commissions, as amended from time to time.
Interpretation of terms defined in the Instrument
Section 1 -- Definition of cleared derivative
A "cleared derivative" is submitted to and cleared by a clearing agency, either voluntarily or in accordance with the clearing requirement set out in National Instrument 94-101 Mandatory Central Counterparty Clearing of Derivatives. The terms "directly" and "indirectly" refer to the chain of clearing intermediaries involved in a clearing a derivative. Where a customer interacts directly with a direct intermediary, the derivative would be considered to be directly submitted to and cleared by a clearing agency. Where an indirect intermediary submits a derivative to a direct intermediary for clearing on behalf of a customer, the derivative is considered to be cleared through the direct intermediary and indirectly submitted to the clearing agency.
Section 1 -- Definition of customer
A direct intermediary is not a customer where it transacts with a clearing agency of which it is a participant. However, a person or company that acts as a direct intermediary can be a customer when clearing its own proprietary financial instruments through another direct intermediary of a clearing agency (or in Québec, a clearing house) where it is not itself a participant. An indirect intermediary is considered a clearing intermediary rather than a customer for a transaction in a cleared derivative where it is providing clearing services to a customer. However, a person or company acting as an indirect intermediary can be a customer to the extent that it is clearing its own proprietary financial instruments through another clearing intermediary. For certainty, there is always one and only one customer per clearing chain. The customer is the person or company entering into the derivative on its own behalf and accessing clearing services through one or more clearing intermediaries.
In a clearing chain that involves an indirect intermediary providing clearing services to a person or company, that person or company would be considered a customer of each clearing intermediary in the chain as well as of the clearing agency. For example, where a customer submits a derivative to an indirect intermediary, it would be a customer of both the indirect intermediary and the direct intermediary that submits the derivative to the clearing agency, as well as of the clearing agency. If there were multiple indirect intermediaries involved in clearing a derivative, the person or company would be considered a customer of each of these clearing intermediaries.
Section 1 -- Definition of clearing intermediary
We expect that, subject to any available exemption, a clearing intermediary offering clearing services to a customer must register as a derivatives dealer when such requirement is in place. CSA Consultation Paper 91-407 Derivatives: Registration ("Consultation Paper 91-407") outlines the recommended business trigger for determining whether a person is in the business of trading derivatives.{1} These factors include intermediating transactions in derivatives and providing clearing services to third-parties. Please refer to Consultation Paper 91-407 for further details.
A person or company providing services in respect of a cleared derivative would be considered a clearing intermediary for the purposes of the Instrument if it requires, receives or holds collateral from, for or on behalf of a customer. Accordingly, an intermediary that does not receive, hold or transfer collateral from, for on behalf of a customer would not be subject to the requirements under the Instrument even if it facilitates some limited aspects of the relationship between a clearing intermediary and a customer with respect to cleared derivatives (e.g., organizing orders for derivatives).
Section 1 -- Definition of customer collateral
With respect to "customer collateral", we wish to point out that although a customer may deliver certain collateral to a clearing intermediary, this specific collateral may not be the collateral delivered to the regulated clearing agency to satisfy the customer's margin requirements at the regulated clearing agency. A clearing intermediary may "upgrade" or "transform" the collateral delivered by the customer pursuant to their agreement. For example, a customer may deliver cash as collateral and, pursuant to their agreement, the clearing intermediary may deliver securities of an equivalent value to the regulated clearing agency. Any collateral that is transformed, upgraded or otherwise and delivered to the regulated clearing agency on behalf of a customer would be considered customer collateral. Generally, the original collateral delivered by the customer is no longer considered customer collateral once it has been transformed or upgraded and therefore is no longer subject to the requirements of the Instrument. The transformed or upgraded collateral exchanged for the customer's original collateral becomes the customer collateral that is subject to the Instrument and must be treated as customer collateral regardless of the number or type of transformations or upgrades it undergoes.
Paragraph (b) of the definition of "customer collateral" refers to a situation where a clearing intermediary submits its own property to satisfy the obligations of one or more customers to the regulated clearing agency. An example of this would be a direct intermediary providing its own property to meet an intra-day margin call by the regulated clearing agency. Where a clearing intermediary submits its own property on behalf of a customer, this property must be treated as customer collateral.
Section 1 -- Definition of direct intermediary
A "direct intermediary" is a participant of the regulated clearing agency where a customer's derivative is submitted for clearing. A direct intermediary is responsible for submitting a customer's derivative to the regulated clearing agency and has obligations to the regulated clearing agency with respect to the derivative.
Section 1 -- Definition of indirect intermediary
An "indirect intermediary" is a person or company that facilitates clearing on behalf of a customer but is not a participant of the regulated clearing agency where a customer's derivative is submitted. In order to clear its customer's derivative, the indirect intermediary would enter into an agreement with a direct intermediary (or another indirect intermediary that would in turn submit the derivative to a direct intermediary) that would submit the derivative to the regulated clearing agency to be cleared. This clearing relationship is often referred to as "indirect customer clearing".
It is possible that a person or company that is a direct intermediary at one regulated clearing agency could also act as an indirect intermediary in order to access another regulated clearing agency, of which it is not a participant. The classification as a direct intermediary or indirect intermediary is not exclusive. A clearing intermediary can be a direct intermediary for some derivatives and an indirect intermediary for others.
Section 1 -- Definition of initial margin
The term "initial margin" refers to collateral required by a regulated clearing agency to cover potential future losses resulting from expected changes in the value of a cleared derivative over a pre-determined close-out period with a certain level of confidence.
Section 1 -- Definition of participant
The term "participant" refers to a clearing intermediary that is a member of a regulated clearing agency.
Section 1 -- Definition of permitted depository
A "permitted depository" is a person or company acceptable for holding customer collateral posted with a clearing intermediary or regulated clearing agency. A clearing intermediary that itself meets the requirements of the definition may hold customer collateral directly and is not required to use a third-party permitted depository.
In recognition of the international nature of the derivatives market, paragraph (e) of the definition permits a foreign bank or trust company with a minimum amount of reported shareholders' equity to act as a permitted depository and hold customer collateral, provided its head office or principal place of business is located in a permitted jurisdiction and it is regulated as a bank or trust company in the permitted jurisdiction. Paragraph (g) of the definition permits a prudentially regulated entity, other than a bank or trust company, whose head office or principal place of business is located outside of Canada, to act as a permitted depository for customer collateral it receives in connection with providing clearing services to a customer, provided that it is subject to and in compliance with the laws of a permitted jurisdiction relating to clearing services and customer collateral.
Section 1 -- Definition of permitted investment
The term "permitted investment" sets out a principles-based approach to determining the types of instruments in which a clearing intermediary or regulated clearing agency may invest customer collateral, in accordance with the provisions of the Instrument. The term is intended to cover an investment in an instrument that is secured by, or is a claim on, high-quality obligors, and which allows for quick liquidation with little, if any, adverse price effect, for the purpose of mitigating market, credit and liquidity risk.
We expect that a clearing intermediary or regulated clearing agency that invests customer collateral in accordance with the Instrument would ensure such investment is:
• consistent with its overall risk-management strategy,
• fully disclosed to its customers,
• limited to instruments that are secured by, or are claims on, high-quality obligors, and
• able to be liquidated quickly with little, if any, adverse price effect.
We are also of the view that it would be inconsistent with the principles-based approach to permitted investments for a clearing intermediary or regulated clearing agency to invest customer collateral in its own securities or those of its affiliated entities.
Examples of instruments that would be considered permitted investments by the local securities regulatory authority include each of the following:
• debt securities issued by or guaranteed by the Government of Canada or the government of a province or territory of Canada;
• debt securities that are issued or guaranteed by a municipal corporation in Canada;
• certificates of deposit, that are not securities, issued by a bank listed in Schedule I, II or III to the Bank Act (Canada) ("Bank Act");{2}
• commercial paper fully guaranteed as to principal and interest by the Government of Canada;
• interests in money market mutual funds.
We are also of the view that foreign investments in high-quality obligors exhibiting the same conservative characteristics as the instruments listed above would be acceptable.
Section 1 -- Definition of permitted jurisdiction
Paragraph (a) of the definition of "permitted jurisdiction" captures jurisdictions where foreign banks authorized under the Bank Act to carry on business in Canada, subject to supervision by the Office of the Superintendent of Financial Institutions ("OSFI"), are located.{3} The following countries and their political subdivisions are included: Belgium, France, Germany, Ireland, Japan, Netherlands, Singapore, Switzerland, United Kingdom (including Scotland) and the United States of America.
For paragraph (b) of the definition of "permitted jurisdiction," in the case of the euro, where the currency does not have a single "country of origin", the provision will be read to include all countries in the euro area{4} and countries using the euro under a monetary agreement with the European Union.{5}
Section 1 -- Definition of qualifying central counterparty
The definition of "qualifying central counterparty" is based on the qualifying central counterparty standard set out in the July 2012 final report entitled Capital requirements for bank exposures to central counterparties{6} published by the Basel Committee on Banking Supervision ("BCBS"). The BCBS has further stated{7} that if a regulator of a central counterparty has provided a public statement that the central counterparty has the status of a qualifying central counterparty, then the central counterparty may be considered to be a qualifying central counterparty. We are similarly of the view that a local counterparty may rely on a public statement made by a regulator of a central counterparty that the central counterparty is a qualifying central counterparty. The qualifying central counterparty standard is also discussed in CSA Multilateral Staff Notice 24-311 Qualifying Central Counterparties.
Section 1 -- Definition of segregate
While the term "segregate" means to separately hold or separately account for customer collateral or positions, consistent with the PFMI Report, accounting segregation is acceptable.
Section 2 -- Application
The Instrument applies to all regulated clearing agencies regardless of location; however, under subsection 2(1), a regulated clearing agency whose head office or principal place of business is in a foreign jurisdiction is only required to comply with the provisions of the Instrument with respect to the cleared derivatives of local customers. The Instrument has broader application with respect to a regulated clearing agency located in a local jurisdiction; such a regulated clearing agency is subject to the requirements of the Instrument in respect of the cleared derivatives of all of its customers (whether they are local customers or not).
The Instrument applies, regardless of location, to a clearing intermediary that provides clearing services to a local customer, but only in respect of a local customer's cleared derivatives. For example, a clearing intermediary providing clearing services to a local customer would be subject to the requirements of the Instrument only as they relate to the local customer and the cleared derivatives of the local customer. The Instrument is not applicable to the clearing intermediary when providing clearing services to foreign customers.
Under subsection 2(3), regulated clearing agencies and clearing intermediaries that provide clearing services for over-the-counter ("OTC") options on securities, are not required to comply with the Instrument in respect of such OTC options. Options on securities, including OTC options on securities, are subject to existing securities legislation. For example, OTC options on securities are regulated as securities under the Securities Act (Ontario) and as derivatives under the Derivatives Act (Québec).{8}
PART 2 TREATMENT OF CUSTOMER COLLATERAL BY A CLEARING INTERMEDIARY
Part 2 contains requirements for the treatment of customer collateral by a clearing intermediary.
Section 3 -- Segregation of customer collateral -- clearing intermediary
Recognizing that methods for segregating customer collateral at the clearing intermediary level may differ depending on collateral and entity type, we are of the view that parties should have the benefit of flexibility in their collateral arrangements. However, the principle remains that notwithstanding the legal arrangement under which customer collateral is posted with a clearing intermediary, the clearing intermediary must treat customer collateral posted with it as belonging to customers. For example, consider a title transfer collateral arrangement where the title to a customer's property is posted as collateral and legal title is transferred to a clearing intermediary collecting the collateral. Despite the transfer of legal title from the customer to the clearing intermediary, the clearing intermediary must treat the property as customer collateral transferred by or on behalf of the customer relating to the customer's cleared derivatives.
Subsection 3(1) requires a clearing intermediary to segregate customer collateral from its own property, including from collateral advanced for a proprietary position. For example, a direct intermediary's proprietary positions (i.e., a house account) would be required to be held or accounted for separately from customer positions. Similarly, an indirect intermediary would be required to establish a separate account for its customers with its direct intermediary, so that the indirect intermediary's proprietary positions are held or accounted for separately from those of its customers. Records maintained by a clearing intermediary must make it clear that customer accounts are for the benefit of customers only.
Section 4 -- Holding of customer collateral -- clearing intermediary
Customer collateral posted by a clearing intermediary and held at a permitted depository may be commingled in an omnibus account (i.e., all of the clearing intermediary's customers' customer collateral is held in one omnibus account) if each customer's customer collateral is segregated on a recordkeeping basis. Additionally, the recordkeeping obligations in the Instrument require a clearing intermediary to identify the positions and the value of the collateral held for each customer within an omnibus customer account.
We expect that a clearing intermediary that holds customer collateral at a permitted depository in accordance with the Instrument would take reasonable efforts to confirm that the permitted depository:
• qualifies as a permitted depository under the Instrument;
• has appropriate rules, policies and procedures, including robust accounting practices, to help ensure the integrity of the customer collateral and minimize and manage the risks associated with the safekeeping and transfer of the collateral;
• maintains securities in an immobilised or dematerialised form for their transfer by book entry;
• protects customer collateral against custody risk through appropriate rules and procedures consistent with its legal framework;
• employs a robust system that ensures segregation between the permitted depository's own property and the property of its participants and segregation among the property of participants, and where supported by the legal framework, supports operationally the segregation of property belonging to a participant's customers on the participant's books and facilitates the transfer of customer collateral;
• identifies, measures, monitors, and manages its risks from other activities that it may perform;
• facilitates prompt access to customer collateral, when required.
If a clearing intermediary is a permitted depository, as defined in the Instrument, it may hold customer collateral itself and is not required to hold customer collateral at a third party depository. For example, a Canadian financial institution that acts as a clearing intermediary would be permitted to hold customer collateral provided it did so in accordance with the requirements of the Instrument. Where a clearing intermediary deposits customer collateral with a permitted depository, the clearing intermediary is responsible for ensuring the permitted depository maintains appropriate books and records to ensure customer collateral can be attributed to each customer.
Section 5 -- Excess margin -- clearing intermediary
We would interpret the requirement that a clearing intermediary identify and record the value of excess margin as applying only to the excess margin that the clearing intermediary holds. For example, a direct intermediary would not be required to keep records of the excess margin required from a customer by an indirect intermediary to which it provides clearing services.
Section 6 -- Use of customer collateral -- clearing intermediary
Under subsection 6(2), the use of customer collateral attributable to one customer to satisfy the obligations of another customer is not permitted. Although customer collateral may be held in one omnibus account, such collateral is not available to satisfy customer obligations generally. Therefore, a clearing model that allows recourse to a non-defaulting customer's collateral, including any model that permits fellow customer risk, violates this provision and would not be permitted to be offered to customers. For certainty, fellow customer risk is found in a clearing model that allows the customer collateral of a non-defaulting customer to be used to settle the obligations of a defaulting customer. The pooling of customer collateral held by a clearing intermediary pursuant to applicable bankruptcy and insolvency laws would not be considered use of customer collateral by the clearing intermediary and is permitted where required by applicable laws.
Subsection 6(3) allows a clearing intermediary to place a lien on customer collateral where the lien arises in connection with a cleared derivative. This exception recognizes that certain clearing arrangements involve the granting of security interests in customer collateral. A clearing intermediary is prohibited from imposing or permitting a lien that is not expressly permitted by the instrument on customer collateral and should such an improper lien be placed on customer collateral, the clearing intermediary must take all reasonable steps to promptly address the improper lien. However, a lien over excess collateral is not restricted where the lien is imposed to secure or extend credit to the customer.
Section 7 -- Investment of customer collateral -- clearing intermediary
Subsection 7(3) provides that any loss resulting from a permitted investment of customer collateral must not be borne by the customer. This requirement relates only to investments made by a clearing intermediary using customer collateral, not to collateral provided by a customer. For example, if a customer provided government bonds as collateral, and those bonds lost market value, the clearing intermediary would not be required to bear those losses. Similarly, where a customer provided collateral to a clearing intermediary and it was transformed into government bonds to be used as customer collateral posted to a regulated clearing agency, the clearing intermediary would not be required to bear any loss in market value of the transformed customer collateral.
Although losses in the value of invested customer collateral are not to be allocated to a customer, we are of the view that parties should be free to contract for the allocation of gains resulting from a clearing intermediary's investment activities in accordance with the Instrument.
Section 8 -- Use of customer collateral -- indirect intermediary default
An example of when a clearing intermediary may apply customer collateral to settle the obligations of a defaulting indirect intermediary is when a customer's default causes the default of the indirect intermediary. In such case, a direct intermediary could use the defaulting customer's collateral to satisfy the indirect intermediary's obligations attributable to the customer's default.
Section 9 -- Acting as a clearing intermediary
Paragraph 9(1)(a) applies to a clearing intermediary that is prudentially regulated in a local jurisdiction. Prudential regulation by an authority in Canada should ensure that a clearing intermediary is adequately capitalized and has sufficient liquidity such that it is financially sound and does not present a significant solvency risk to customers. In Canada, prudential regulation of federally regulated financial institutions is undertaken by OSFI. Other regulators that perform prudential oversight include certain provincial prudential market regulators, such as the Autorité des marchés financiers in Québec, or other local securities regulatory authorities when the proposed registration regime for over-the-counter derivatives ("OTC derivatives") is implemented.
Paragraph 9(1)(c) applies to a clearing intermediary that is prudentially regulated and is subject to and in compliance with laws relating to clearing services and customer collateral in a permitted jurisdiction. This would include, for example, a futures commission merchant registered with the U.S. Commodity Futures Trading Commission ("CFTC") that is authorized by the CFTC to provide clearing services for OTC derivatives.
The CSA Derivatives Committee is developing a registration regime that will apply to clearing intermediaries. Once in force, subject to any available exemptions, we anticipate that registration will be required for clearing intermediaries to offer clearing services to local customers.
For greater certainty, pursuant to the application provision in paragraph 2(1)(b), the requirement under subsection 9(2) only applies to cleared derivatives involving local customers. Other than in British Columbia, Manitoba and Ontario, a foreign clearing intermediary may use a qualifying central counterparty instead of a regulated clearing agency if the foreign clearing intermediary qualifies for the exemption provided for in subsection 48(1) and otherwise complies with the requirements in subsection 48(2).
Section 10 -- Risk management -- clearing intermediary
We expect that rules, policies and procedures designed to identify, monitor and reasonably mitigate material risks arising from offering clearing services to an indirect intermediary and management of a default by an indirect intermediary would include all of the following:
• following industry standard best practices for understanding an indirect intermediary's: (i) identity and corporate structure, (ii) financial resources (e.g., by establishing credit and liquidity limits), (iii) product knowledge (e.g., by establishing a list of the indirect intermediary's products allowed to be cleared) and (iv) technical infrastructure (e.g., establishing adequate operational capacity and communication links between the indirect intermediary and the clearing intermediary);
• measuring and monitoring the positions of each indirect intermediary including (i) the daily valuation of the indirect intermediary's positions and cash flow obligations and (ii) market risk resulting from those positions;
• a default management plan which describes the steps followed in the event of an indirect intermediary's default.
Section 11 -- Risk management -- indirect intermediary
We expect that rules, policies and procedures designed to identify, monitor and reasonably mitigate material risks arising from offering indirect clearing services to customers would include all of the following:
• following industry standard best practices for understanding a customer's: (i) identity and corporate structure, (ii) financial resources (e.g., by establishing credit and liquidity limits), (iii) product knowledge (e.g., by establishing a list of the customer's products allowed to be cleared) and (iv) technical infrastructure (e.g., establishing adequate operational capacity and communication links between the customer and the indirect intermediary);
• measuring and monitoring the positions of each customer including (i) the daily valuation of the customer's positions and cash flow obligations and (ii) market risk resulting from those positions.
PART 3 RECORDKEEPING BY A CLEARING INTERMEDIARY
Part 3 outlines the minimum recordkeeping requirements that apply to clearing intermediaries. The effectiveness of the customer protections required under the Instrument is predicated on accurate and thorough recordkeeping by clearing intermediaries.
Section 12 -- Retention of records -- clearing intermediary
The records and supporting documentation related to a particular cleared derivative required to be prepared pursuant to this Part and Part 4 must be retained for at least 7 years from the date the cleared derivative expires or is terminated.
Any customer profiles, account agreements or other general information collected from a customer at any time the clearing intermediary provides clearing services for the customer, including prior to the date upon which the customer enters into a cleared derivative, must be kept for at least 7 years after the date upon which the customer's last derivative that is cleared by the clearing intermediary expires or is terminated.
All records and supporting documentation must be kept in accordance with industry best practices for record retention in Canada including safety and durability standards.
In Manitoba, the statutory minimum record retention period is 8 years.
Section 13 -- Daily records -- clearing intermediary
We are of the view that accurate recordkeeping requires, at minimum, daily valuations of customer collateral using industry standard best practice methodologies.
With respect to records required to be kept under paragraph 13(3)(b):
• subparagraph (i) refers to any revenue generated by the customer collateral, including, for example, dividend pay-outs relating to securities and coupon payments relating to debt instruments;
• subparagraph (ii) refers to any changes in the value of property forming part of the customer collateral, including, for example, an increase or decrease in the value of a security;
• subparagraph (iii) refers to charges that have accrued, or may accrue, that are payable by a customer and have been agreed to be paid by the customer in respect of the clearing services provided to the customer; such charges may include, for example, transaction or currency exchange charges or charges relating to the settlement or termination of a cleared derivative.
Section 18 -- Identifying records -- multiple clearing intermediaries
Where a clearing intermediary allows a person or company to act as an indirect intermediary, the clearing intermediary assumes recordkeeping obligations relating to the indirect intermediary and its customers. The effect of paragraphs 18(a) and (b) together is to enable the indirect intermediary to easily identify its own positions and property, and the positions and collateral held for, or on behalf, of each of its customers.
Section 19 -- Records of investment of customer collateral -- clearing intermediary
The date of the investment required to be recorded under paragraph 19(a) includes both the trade date and the settlement date. We are of the view that the requirement in paragraph 19(d) would be fulfilled by providing a unique identifier from an industry-accepted identifying standard, such as an ISIN or CUSIP number or, if an identifier is not available, a plain language description of each instrument or asset.
Pursuant to paragraph 7(2)(a) of the instrument, each investment of customer collateral must be in a permitted investment.
Section 20 -- Records of currency conversion -- clearing intermediary
We expect that currency conversion trade records would include, at minimum, all of the following:
• the legal entity identifier ("LEI") of the customer or, if the customer is ineligible to obtain an LEI as determined by the Global Legal Entity Identifier System, the name of the customer;
• the date of the currency exchange;
• the amount and original currency of the funds to be exchanged;
• the exchange rate at which the currency exchange is made;
• the amount and new currency resulting from the exchange;
• the name of the institution which made the exchange or provided the exchange rate.
PART 4 REPORTING AND DISCLOSURE BY A CLEARING INTERMEDIARY
Part 4 outlines disclosure and reporting to be made by a clearing intermediary to customers, regulated clearing agencies and the local regulator or securities regulatory authority. Disclosure required to be provided to customers under this Part is not required on a transaction-by-transaction basis.
The written disclosure required under sections 21, 22, 23 and 27 is necessary only once upon the opening of each customer account, not prior to each cleared derivative transaction. If there are changes to the information contained in the disclosure a customer received, the customer must be promptly informed in writing of such changes. Where there are multiple clearing intermediaries, direct intermediaries and indirect intermediaries may provide disclosure either to a clearing intermediary closer in the clearing chain to the customer or directly to the customer. Written disclosure and notice of changes to such disclosure can be provided in electronic form by delivering copies of required materials or by providing links to online information to the customer or clearing intermediary.
Where clearing intermediaries are already engaged in cleared derivative transactions with regulated clearing agencies, other clearing intermediaries or customers before the Instrument comes into force, new written disclosure is not required to be delivered to customers if the written disclosure delivered prior to the Instrument coming into force meets the requirements for written disclosure set out in this Part. We acknowledge the confidential nature of the information reported to the local regulator or securities regulatory authority, and each regulator or securities regulatory authority intends to treat it as such, subject to applicable provisions of the legislation adopted by the local jurisdiction, including any applicable freedom of information and protection of privacy legislation. However, information may be shared with self-regulatory organizations or other relevant regulatory authorities.
Section 21 -- Clearing intermediary delivery of disclosure by regulated clearing agency
Section 21 requires a clearing intermediary to provide disclosure, including investment guidelines and policies for investing customer collateral, received from a regulated clearing agency pursuant to sections 41 and 45 to its customer. Where there is a chain of clearing intermediaries, the direct intermediary may provide this disclosure to the indirect intermediary, which is then required to provide this disclosure to the customer. Both subsections 41(2) and 45(2) require a regulated clearing agency to disclose any changes to the information previously disclosed. A clearing intermediary is required to promptly send to its customers all of the information related to changes in the disclosure provided by a regulated clearing agency under sections 41 and 45.
Section 22 -- Disclosure to customer by clearing intermediary
Customer collateral held at the clearing intermediary level may receive different treatment from customer collateral held at the regulated clearing agency in the event of a clearing intermediary's bankruptcy or insolvency. We expect that the disclosure required by this provision would provide customers with clear information on the treatment of their collateral in a default situation. For example, there may be situations where customer collateral held in a customer account maintained by a clearing intermediary would, pursuant to applicable bankruptcy laws, be combined with the property of other customers.
We expect that the information given in the written disclosure would assist customers in evaluating: (i) the level of protection provided, (ii) the manner in which segregation and the transfer of assets is achieved, including the method for determining the value at which customer positions will be transferred, and (iii) any risks or uncertainties associated with such arrangements.
Disclosure helps customers assess the related risks and conduct due diligence when entering into derivatives that are cleared at a regulated clearing agency through one or more clearing intermediaries. Examples of the information that we expect the disclosure would provide include all of the following:
• information about the clearing intermediary including its name, address and principal place of business and contact information;
• the bankruptcy and insolvency laws which apply to the clearing intermediary;
• any material risks which may impact the clearing intermediary's ability to transfer customer collateral and enforce rights in relation to customer collateral during a default, including an explanation of how such risks are material to the customer;
• a basic overview of the clearing intermediary's fund segregation and collateral management practices and policies;
• the process for recovering or transferring customer collateral should the clearing intermediary default;
• information regarding the proactive steps that a customer must take to protect its collateral;
• an explanation of the interaction of domestic and foreign laws applicable to customer collateral held by the clearing intermediary.
Section 23 -- Disclosure to customer by indirect intermediary
In addition to the disclosure required under section 22, an indirect intermediary is required to disclose to its customers any additional material risks to a customer's positions and customer collateral that arise as a result of the indirect clearing relationship and an explanation of how such risks are material to the customer.
Section 24 -- Customer information -- clearing intermediary
In order to facilitate a timely transfer of collateral and positions in a default scenario, a regulated clearing agency should have sufficient information to identify each customer of a clearing intermediary and each customer's positions and customer collateral. Additionally, the obligation on a clearing intermediary under this section to provide information on the current value of its customers' positions and customer collateral includes indicating to the direct intermediary or regulated clearing agency, as applicable, where a customer is in default of its obligations.
We expect that identifying information required under this section would include the LEI of the customer or, if the customer is ineligible to obtain an LEI as determined by the Global Legal Entity Identifier System, the name or other identifier of the customer.
Section 25 -- Customer collateral report -- regulatory
Regular reporting on customer collateral deposits and holdings assists securities regulatory authorities in monitoring customer collateral arrangements and in developing and implementing rules to protect customer assets that are responsive to market practices. To that end, subsections 25(1) and 25(2) set out reporting requirements for direct intermediaries and indirect intermediaries, respectively, regarding customer collateral. A completed Form 94-102F1 or Form 94-102F2, as applicable, will provide the local securities regulatory authority with a snapshot of the value of collateral held or posted by each reporting clearing intermediary. In Ontario, Form 94-102F1 and Form 94-102F2 are required to be filed electronically through the Ontario Securities Commission's Electronic Filing Portal. Please see OSC Rule 11-501 Electronic Delivery of Documents to the Ontario Securities Commission for more information.{9}
Section 26 -- Customer collateral report -- customer
The customer collateral report required under this section could be made available to the customer or indirect intermediary through either direct electronic access available to the customer or indirect intermediary at any time or a daily report sent to the customer or indirect intermediary.
Section 27 -- Disclosure of investment of customer collateral
We expect that the disclosure required under this section would include statements that customer collateral is permitted to be invested in accordance with section 7 of the Instrument and that any losses resulting from the clearing intermediary's investment of the customer collateral will not be borne or otherwise allocated to the customer.
We are of the view that the requirement to provide disclosure under subsection 27(1) and subsection 27(2) may be satisfied by directing a customer or, if applicable, the indirect intermediary to the disclosure on the clearing intermediary's website.
PART 5 TREATMENT OF COLLATERAL BY A REGULATED CLEARING AGENCY
Part 5 contains requirements for the treatment of customer collateral by regulated clearing agencies.
Section 28 -- Collection of initial margin
The requirement that a regulated clearing agency collect initial margin on a gross basis for each customer means that a regulated clearing agency may not, and may not permit its direct intermediaries to, offset initial margin positions of different customers against one another. However, the initial margin collected from a customer may be determined by netting across the various cleared derivative positions of that customer. Further, a regulated clearing agency is not prohibited from collecting variation margin for cleared derivatives on a net basis from its direct intermediaries.
Margin requirements are determined by the regulated clearing agency in accordance with its rules, policies and procedures. For further discussion, please see National Instrument 24-102 Clearing Agency Requirements ("NI 24-102") for requirements applicable to clearing agency margin calculation.
Section 29 -- Segregation of customer collateral -- regulated clearing agency
Records maintained by the regulated clearing agency must make it clear that customer accounts are for the benefit of customers only.
We are of the view that parties should have the benefit of flexibility in their collateral arrangements. However, the principle remains that notwithstanding the legal arrangement under which customer collateral is posted with a regulated clearing agency, the regulated clearing agency must treat customer collateral posted with it as belonging to customers. For example, consider a title transfer collateral arrangement where the title to the customer's property is posted as collateral and legal title is transferred to a regulated clearing agency collecting the collateral. Despite the transfer of legal title from the customer (or clearing intermediary on behalf of the customer) to the regulated clearing agency, the regulated clearing agency must treat the property as customer collateral transferred by, for or on behalf of the customer relating to the customer's cleared derivatives.
Section 30 -- Holding of customer collateral -- regulated clearing agency
A regulated clearing agency is a permitted depository under the Instrument and may hold collateral itself if it offers depository services. Accordingly, a regulated clearing agency is not required to hold customer collateral at a third-party permitted depository.
The customer collateral of multiple customers may be commingled in an omnibus customer account if each customer's customer collateral is segregated on a recordkeeping basis. Additionally, the recordkeeping obligations in the Instrument require the regulated clearing agency to identify the positions and the value of the collateral held for each individual customer within an omnibus customer account.
We expect that a regulated clearing agency that holds customer collateral at a third-party permitted depository in accordance with the Instrument would take reasonable efforts to confirm that the permitted depository:
• qualifies as a permitted depository under the Instrument;
• has appropriate rules, policies and procedures, including robust accounting practices, to help ensure the integrity of the customer collateral and minimize and manage the risks associated with the safekeeping and transfer of the collateral;
• maintains securities in an immobilised or dematerialised form for their transfer by book entry;
• protects customer collateral against custody risk through appropriate rules and procedures consistent with its legal framework;
• employs a robust system that ensures segregation between the permitted depository's own property and the property of its participants and segregation among the property of participants, and where supported by the legal framework, supports operationally the segregation of property belonging to a participant's customers on the participant's books and facilitates the transfer of customer collateral;
• identifies, measures, monitors, and manages its risks from other activities that it may perform; and
• facilitates prompt access to customer collateral, when required.
Paragraph 30(b) requires a regulated clearing agency to hold customer collateral relating to cleared derivatives separately from any other type of property that is not customer collateral, including any other property posted by a customer as collateral relating to another investment or financial instrument that is not a cleared derivative. For example, the customer collateral of a customer may be commingled in an omnibus account with the customer collateral of another customer but may not be commingled with collateral belonging to the customer or any other customer relating to a futures contract.
Section 31 -- Excess margin -- regulated clearing agency
We would interpret the requirement that a regulated clearing agency identify and record the value of excess margin as applying only to the excess margin that the regulated clearing agency holds. For example, a regulated clearing agency would not be required to keep records relating to excess margin held by a clearing intermediary.
Section 32 -- Use of customer collateral -- regulated clearing agency
Under subsection 32(2), subject to an exception for excess collateral, regulated clearing agencies are only permitted to apply a customer's customer collateral to the cleared derivatives of that customer. Accordingly, the Instrument prohibits the cross-margining of a customer's cleared derivatives and futures positions. The reasoning for this is that the regulatory framework applicable to futures in certain jurisdictions, including Canada, may make customers more susceptible to shortfalls in the event of a clearing intermediary's insolvency and therefore cross-margining could undermine a customer's ability to port its cleared derivatives positions. However, in some jurisdictions, customer protection requirements applicable to futures are equivalent to those applicable to cleared derivatives. Under such regimes, cross-margining may not represent a material risk to porting a customer's positions in cleared derivatives. Therefore, when considering an application for discretionary relief from the prohibition on cross-margining or when making an equivalence determination of a foreign jurisdiction's regulatory requirements for the purpose of substituted compliance, the regulator or securities regulatory authority will take these factors into account.
Use of customer collateral attributable to one customer to satisfy the obligations of another customer is not permitted. Although customer collateral may be held in one omnibus account, such collateral is not available to satisfy customer obligations generally. Therefore, a clearing model that allows recourse to a non-defaulting customer's collateral, including any model that permits fellow customer risk, violates this provision and would not be permitted to be offered to customers. For certainty, fellow customer risk is found in a clearing model that allows the customer collateral of a non-defaulting customer to be used to settle the obligations of a defaulting customer. The pooling of customer collateral held by a regulated clearing agency pursuant to applicable bankruptcy and insolvency laws would not be considered use of customer collateral by the regulated clearing agency and is permitted where required by applicable laws.
Subsection 32(3) allows a regulated clearing agency to place a lien on customer collateral where the lien arises in connection with a cleared derivative. This exception recognizes that certain clearing arrangements involve the granting of security interests in customer collateral. A regulated clearing agency is prohibited from imposing or permitting a lien that is not expressly permitted by the Instrument on customer collateral and should such an improper lien be placed on customer collateral, the regulated clearing agency must take all reasonable steps to promptly address the improper lien. However, a lien over excess collateral is not restricted where the lien is imposed to secure or extend credit to the customer.
Section 33 -- Investment of customer collateral -- regulated clearing agency
Subsection 33(3) provides that any loss resulting from a permitted investment of customer collateral must not be borne by the customer. This requirement relates only to investments made by a regulated clearing agency using customer collateral, not to collateral provided by a customer. For example, if a customer provided government bonds as collateral, and those bonds lost market value, the regulated clearing agency would not be required to bear those loses. Similarly, where a customer provided collateral to a regulated clearing agency and it was transformed into government bonds to be used as customer collateral, the regulated clearing agency would not be required to bear any loss in market value of the transformed customer collateral.
Although losses in the value of invested customer collateral are not to be allocated to a customer, we are of the view that parties should be free to contract for the allocation of gains resulting from a regulated clearing agency's investment activities in accordance with the Instrument. Where a regulated clearing agency's rules provide for investment loss mutualisation and allocation to clearing intermediaries, this would not violate the requirement.
Section 34 -- Use of customer collateral -- clearing intermediary default
An example of when a regulated clearing agency may apply customer collateral to settle the obligations of a defaulting clearing intermediary is when a customer's default causes the default of the clearing intermediary, whether directly or through the default of an indirect intermediary. In such case, a regulated clearing agency could use the defaulting customer's collateral, including its customer collateral under the Instrument, to satisfy the clearing intermediary's obligations attributable to the customer's default.
Section 35 -- Risk management --NI 24-102 applies
NI 24-102 applies to all regulated clearing agencies providing clearing services to local customers, including to clearing agencies that are exempt from recognition if they clear derivatives for customers.
PART 6 RECORDKEEPING BY A REGULATED CLEARING AGENCY
Part 6 outlines the minimum recordkeeping requirements that apply to regulated clearing agencies. The effectiveness of the customer protections required under the Instrument is predicated on accurate and thorough recordkeeping by regulated clearing agencies.
Section 36 -- Retention of records -- regulated clearing agency
All records prepared pursuant to this Part and Part 7 must be kept in accordance with industry best practices for record retention in Canada including safety and durability standards.
Since clearing intermediaries are required to maintain records and supporting documentation related to cleared derivatives of their customers for at least 7 years pursuant to section 12, it is not necessary for a regulated clearing agency to retain records after the related cleared derivatives expire or are terminated. It would be redundant for both clearing intermediaries and regulated clearing agencies to keep records for an extended period after expiry or termination of a cleared derivative or after the clearing relationship with a customer ends.
Section 37 -- Daily records -- regulated clearing agency
We are of the view that accurate recordkeeping requires, at minimum, daily valuations of customer collateral using industry standard best practice methodologies.
With respect to records required to be kept under paragraph 37(2)(b):
• subparagraph (i) refers to any revenue generated by the customer collateral, including, for example, dividend pay-outs relating to securities and coupon payments relating to debt instruments;
• subparagraph (ii) refers to any changes in the value of property forming part of the customer collateral, including, for example, an increase or decrease in the value of a security; and
• subparagraph (iii) refers to charges that have accrued, or may accrue, that are payable by a customer of a direct intermediary and have been agreed to be paid by the customer in respect of the clearing services provided to the customer; such charges may include, for example, transaction or currency exchange charges or charges relating to the settlement or termination of a cleared derivative.
Section 38 -- Identifying records -- regulated clearing agency
A regulated clearing agency has recordkeeping obligations relating to all customers for which it clears cleared derivatives. The recordkeeping requirement under section 38 extends to any customer collateral held in an account of the regulated clearing agency at a third-party permitted depository.
Paragraph (c) ensures that direct and indirect customers receive equal treatment. Direct intermediaries are required under section 18 to make this information available to indirect intermediaries to which they provide clearing services.
Section 39 -- Records of investment of customer collateral -- regulated clearing agency
The date of the investment required to be recorded under paragraph 39(a) includes both the trade date and the settlement date. We are of the view that the requirement in paragraph 39(d) would be fulfilled by providing a unique identifier from an industry-accepted identifying standard, such as an ISIN or CUSIP number or, if an identifier is not available, a plain language description of each instrument or asset.
Pursuant to paragraph 33(2)(a) of the instrument, each investment of customer collateral must be in a permitted investment.
Section 40 -- Records of currency conversion -- regulated clearing agency
We expect that currency conversion trade records would include, at minimum, all of the following:
• LEI of the customer or, if the customer is ineligible to obtain an LEI as determined by the Global Legal Entity Identifier System, the name of the customer;
• the date of the currency exchange;
• the amount and original currency of the funds to be exchanged;
• the exchange rate at which the currency exchange is made;
• the amount and new currency resulting from the exchange;
• the name of the institution which made the exchange or provided the exchange rate.
PART 7 REPORTING AND DISCLOSURE BY A REGULATED CLEARING AGENCY
Part 7 outlines certain disclosure and reporting to be made by a regulated clearing agency to customers, clearing intermediaries and the local regulator or securities regulatory authority. Disclosure required to be provided to customers under this Part is not required on a transaction-by-transaction basis.
The written disclosure required under sections 41 and 45 is necessary only once upon the opening of each customer account, not prior to each cleared derivative transaction. If there are changes to the information contained in the disclosure a customer received, the customer must be promptly informed in writing of such changes. Where there are multiple clearing intermediaries, a direct intermediary may provide disclosure either to a clearing intermediary closer in the clearing chain to the customer or directly to the customer. Written disclosure and notice of changes to such disclosure can be provided in electronic form by delivering copies of required materials or by providing links to online information to the customer or direct intermediary.
Where a regulated clearing agency is already providing clearing services before the Instrument comes into force, new written disclosure is not required to be delivered to customers if the written disclosure delivered prior to the Instrument coming into force meets the requirements for written disclosure set out in this Part.
We acknowledge the confidential nature of the information reported to the local regulator or securities regulatory authority, and each regulator or securities regulatory authority intends to treat it as such, subject to applicable provisions of the legislation adopted by the local jurisdiction, including any applicable freedom of information and protection of privacy legislation. However, information may be shared with self-regulatory organizations or other relevant regulatory authorities.
Section 41 -- Disclosure to direct intermediaries by regulated clearing agency
We expect that the information given in the written disclosure would assist customers in evaluating: (i) the level of protection provided, (ii) the manner in which segregation and the transfer of assets is achieved, including the method for determining the value at which customer positions will be transferred, and (iii) any risks or uncertainties associated with such arrangements.
Disclosure helps customers assess the related risks and conduct due diligence when entering into derivatives that are cleared through a direct intermediary of the regulated clearing agency. Examples of the information that we expect the disclosure would provide include all of the following:
• information about the regulated clearing agency including its name, address and principal place of business and contact information;
• a basic overview of the regulated clearing agency's rules, policies and procedures concerning segregation and portability of customers' positions and customer collateral including an explanation of any legal or operational constraints that may impair the ability of the regulated clearing agency to segregate or transfer the positions and related customer collateral of a customer;
• which bankruptcy and insolvency laws apply to the regulated clearing agency and an analysis of applicable laws governing the regulated clearing agency's clearing services including whether the regulated clearing agency is described or named under the Payment and Clearing Settlement Act (Canada);{10}
• the regulated clearing agency's rule book;
• information on the regulated clearing agency's rules and procedures for defaults including the process for recovering or transferring customer collateral should a clearing intermediary default and the size and composition of the financial resource package available in the event of a clearing intermediary's default; and
• the interaction of domestic and foreign laws applicable to customer collateral held by the regulated clearing agency and any other information relevant to using the regulated clearing agency's clearing services.
The written disclosure required under subsection 41(1), is necessary only upon the opening of each customer account, or upon any change to the rules, policies or procedures of the regulated clearing agency, rather than prior to each cleared derivative transaction.
Section 42 -- Customer information -- regulated clearing agency
In order to facilitate a timely transfer of collateral and positions in a default scenario, we expect that a regulated clearing agency would receive complete and timely information from a direct intermediary under subsection 24(1) to identify each customer of a clearing intermediary, and the customer's positions and customer collateral.
Section 43 -- Customer collateral report -- regulatory
Regular reporting on customer collateral deposits and holdings assists securities regulatory authorities in monitoring customer collateral arrangements and in developing and implementing rules to protect customer assets that are responsive to market practices. To that end, section 43 sets out reporting requirements for regulated clearing agencies regarding customer collateral. A completed Form 94-102F3 will provide the local securities regulatory authority with a snapshot of the value of collateral held or posted by the regulated clearing agency. In Ontario, Form 94-102F3 is required to be filed electronically through the Ontario Securities Commission's Electronic Filing Portal. Please see OSC Rule 11-501 Electronic Delivery of Documents to the Ontario Securities Commission for more information.{11}
Section 44 -- Customer collateral report -- direct intermediary
The customer collateral report required under this section could be made available to a direct intermediary through either direct electronic access available to the direct intermediary at any time or a daily report sent to the direct intermediary.
Section 45 -- Disclosure of investment of customer collateral
We expect that the disclosure required under this section would include statements that customer collateral is permitted to be invested in accordance with section 33 of the Instrument and that any losses resulting from the regulated clearing agency's investment of the customer collateral will not be borne or otherwise allocated to the customer. We are of the view that the requirements to provide disclosure under subsection 45(1) and subsection 45(2) may be satisfied by directing a customer to the disclosure on the regulated clearing agency's website.
PART 8 TRANSFER OF POSITIONS
Part 8 provides for the transfer of customer collateral and positions from one clearing intermediary to another, either in a default scenario or upon request of the customer.
The efficient and complete transfer of customer collateral and related positions is important in both pre-default and post-default scenarios but is particularly critical during a clearing intermediary's default or when it is undergoing insolvency proceedings.
Section 46 -- Transfer of customer collateral and positions
It is our expectation that customer collateral and positions be transferred as seamlessly as possible from the perspective of the customer. This means that we expect that a customer's positions would be maintained on identical economic terms as governed the positions immediately before the transfer. In effecting such a transfer, a regulated clearing agency is permitted to operationally close-out and re-book the positions, provided that the ultimate result is that the customer's positions are maintained on identical economic terms as governed immediately before the transfer.
The regulated clearing agency's ability to transfer customer collateral and related positions in a timely manner may depend on such factors as market conditions, sufficiency of information on the individual constituents, and the complexity or size of the customer's portfolio. We would therefore expect the regulated clearing agency to structure its arrangements for the transfer of customer collateral and positions in a way that makes it highly likely that they will be effectively transferred to one or more other direct intermediaries, taking into account all relevant circumstances. In order to achieve a high likelihood of transferability, the regulated clearing agency would need to have the ability to (i) identify the positions belonging to each customer, (ii) identify and assert the regulated clearing agency's rights to related customer collateral held by or through the regulated clearing agency, (iii) transfer positions and related customer collateral to one or more other direct intermediaries, (iv) identify potential direct intermediaries to accept the positions, (v) disclose relevant information to such direct intermediaries so that they can evaluate the counterparty credit and market risk associated with the customers and positions, respectively and (vi) carry out its default management procedures in an orderly manner. We expect that regulated clearing agency's policies and procedures would provide for the proper handling of customer collateral and related positions of customers of a defaulting direct intermediary.
We expect that operations, policies and procedure of clearing intermediaries and regulated clearing agencies be structured to ensure, to the greatest extent possible, that a default by a clearing intermediary does not affect the positions and collateral of the defaulting clearing intermediary's customers. Generally, default by a direct intermediary would occur when it does not, or is unable to, meet its obligations at a regulated clearing agency.
To ensure that a customer's positions and customer collateral are insulated from a direct intermediary's default, including any winding-up or restructuring proceeding of the defaulting direct intermediary, we expect that a regulated clearing agency would be structured, including by having the necessary rules and procedures in place, to effectively and promptly facilitate the transfer of customer collateral and positions to a direct intermediary that (i) is not in default, as that term is defined in the rules and procedures of the relevant regulated clearing agency and (ii) is not reasonably expected to default on its obligations at a regulated clearing agency as they come due.
Although we stress the importance of the transfer of a customer's positions and customer collateral in a default scenario, we acknowledge that there may be circumstances where the portability of all or a portion of a customer's positions is not possible. Where a regulated clearing agency is not able to transfer positions within a pre-defined transfer period specified in its operating rules, it may take all steps permitted by its rules to actively manage its risks in relation to those positions, including liquidating the customer collateral and positions of the defaulting direct intermediary's customers.
We expect that a direct intermediary would also have policies and procedures in place to facilitate the prompt transfer of customer collateral that it holds to one or more direct intermediaries in the event of its own default.
Where a transfer of customer collateral and positions is facilitated under subsection 46(1), the Instrument requires that reasonable efforts are made to ensure that the customer's instructions are followed with respect to the transfer of the customer's positions and customer collateral to a particular transferee direct intermediary. We are of the view that these instructions may be best obtained at the outset of a clearing relationship, and by allowing a customer to identify direct intermediaries to which it consents a priori to such a transfer. If there are circumstances where such instructions would not be obtained, or where a customer's prior instructions would not be followed, we expect those circumstances would be set out in the rules, policies or procedures of the regulated clearing agency. In a default scenario, where a customer has not provided instructions or the transfer of a customer's collateral and positions in accordance with its instructions is not possible, a regulated clearing agency or a direct intermediary may rely on the customer's negative consent (i.e., the customer's silence) in effecting a transfer.
Additionally, a regulated clearing agency or defaulting direct intermediary may promptly transfer the customer's positions and related customer collateral, as a single portfolio or in portions to one or more direct intermediaries.
A regulated clearing agency must have the necessary policies and procedures in place, to facilitate the transfer of the customer collateral and positions of a customer from one direct intermediary to another at the request of the customer. This is also known as a "business-as-usual transfer".
We expect that a customer be able to transfer its customer collateral and positions to another direct intermediary in the normal course of business. Subsection 46(2) requires that a regulated clearing agency be structured, including by having the necessary rules and procedures in place, to facilitate the transfer of customer collateral and related positions upon the customer's request to any one or more non-defaulting direct intermediaries, subject to any notice or other contractual requirements.
Where a business-as-usual transfer of a customer's positions and customer collateral is facilitated under subsection 46(2), we would expect that a regulated clearing agency would promptly transfer the customer's positions and related customer collateral as a single portfolio or in portions to one or more direct intermediaries, as requested by the customer.
A request from a customer to facilitate a business-as-usual transfer of the customer's positions and customer collateral to a particular transferee direct intermediary may also take the form of a consent to transfer obtained by the regulated clearing agency from the customer. When obtaining the consent of the receiving direct intermediary, we would expect the consent to contain information as to which positions and customer collateral are to be transferred.
Section 47 -- Transfer from a clearing intermediary
We are of the view that customers of a clearing intermediary should benefit from protections and rights under the Instrument with respect to the transfer of their positions and customer collateral. To that end, in the event of the clearing intermediary's default, the clearing intermediary must be structured to promptly facilitate such a transfer, as a single portfolio or in portions as requested by the customer, to one or more non-defaulting clearing intermediaries.
PART 9 SUBSTITUTED COMPLIANCE
Section 48 -- Substituted Compliance
Subsection 48(1) contemplates an exemption from the Instrument in the form of substituted compliance for foreign clearing intermediaries that are regulated under the laws of a foreign jurisdiction that achieve substantially the same objectives, on an outcomes basis, as the Instrument. Substituted compliance applies to the provisions of the Instrument where the clearing intermediary is in compliance with the laws of a foreign jurisdiction set out in Appendix A opposite the name of the foreign jurisdiction. The foreign jurisdictions specified for substituted compliance are determined on a jurisdiction by jurisdiction basis, and depend on a review of the laws and regulatory framework of the jurisdiction.
The exemption only applies where a clearing intermediary is in compliance with the requirements of the laws of the applicable foreign jurisdiction specified in Appendix A and does not incorporate any exemption or discretionary relief granted to a clearing intermediary in connection with the laws of the foreign jurisdiction. Where a clearing intermediary relies on an exemption or discretionary relief from the laws of a foreign jurisdiction set out in Appendix A, it will need to apply to the relevant securities regulatory authorities for similar exemptive or discretionary relief from the Instrument.
In respect of a local customer in a local jurisdiction other than British Columbia, Manitoba and Ontario, a clearing intermediary registered, licensed or otherwise permitted to act as a clearing intermediary in a jurisdiction set out in Appendix A may benefit from substituted compliance under subsection 48(1), if the clearing intermediary offers clearing services to local customers through either a clearing agency that is a qualifying central counterparty or a regulated clearing agency.
Subsection 48(3) contemplates an exemption from the Instrument in the form of substituted compliance for foreign regulated clearing agencies that are recognized or exempt from recognition by a Canadian securities regulatory authority and are in compliance with the laws of a foreign jurisdiction that achieve substantially the same objectives, on an outcomes basis, as the Instrument. Substituted compliance applies to the provisions of the Instrument where the regulated clearing agency is in compliance with the laws of a foreign jurisdiction set out in Appendix A opposite the name of the foreign jurisdiction.
The exemption only applies where a regulated clearing agency is in compliance with the requirements of the laws of the applicable foreign jurisdiction specified in Appendix A and does not incorporate any exemption or discretionary relief granted to a regulated clearing agency in connection with the laws of the foreign jurisdiction. Where a regulated clearing agency relies on an exemption or discretionary relief from the laws of a foreign jurisdiction set out in Appendix A, it will need to apply to the relevant securities regulatory authorities for similar exemptive or discretionary relief from the Instrument.
In accordance with subsections 48(2) and 48(4), the "residual" provisions listed in Appendix A must be complied with when providing clearing services for a local customer, even if a foreign clearing intermediary or foreign regulated clearing agency is in compliance with the laws of a foreign jurisdiction set out in Appendix A.
{1} See subsection 6.1(b) of Consultation Paper 91-407.
{2} Bank Act (SC 1991, c 46).
{3} Ibid. at Part XII.1; For a list of authorized foreign banks regulated under the Bank Act and subject to OSFI supervision, see: Office of the Superintended of Financial Institutions, Who We Regulate (available: http://www.osfi-bsif.gc.ca/Eng/wt-ow/Pages/wwr-er.aspx?sc=1&gc=1#WWRLink11).
{4} European Union, Economic and Financial Affairs, What is the euro area?, May 18, 2015, online: European Union (http://ec.europa.eu/economy_finance/euro/adoption/euro_area/index_en.htm).
{5} European Union, Economic and Financial Affairs, The euro outside the euro area, April 9, 2014, online: European Union (http://ec.europa.eu/economy_finance/euro/world/outside_euro_area/index_en.htm).
{6} Basel Committee on Banking Supervision (BCBS), Capital requirements for bank exposures to central counterparties, July 2012, online: Bank for International Settlements (http://www.bis.org).
{7} BCBS, Basel III counterparty credit risk and exposures to central counterparties -- Frequently asked questions, updated December 2012, online: Bank for International Settlements (http://www.bis.org).
{8} Securities Act (RSO 1990 c S.5) at s. 1(1), definition of "security"; Derivatives Act (RLRQ 2008 c I-14.01) at s. 3, definition of "derivative".
{9} OSC Rule 11-501 Electronic Delivery of Documents to the Ontario Securities Commission, online: Ontario Securities Commission (http://www.osc.gov.on.ca/en/SecuritiesLaw_11-501.htm).
{10} Payment and Clearing Settlement Act (SC 1996 c 6 sch).
{11} Supra note 9.
