CSA Staff Notice 24-310
Status Update on Proposed Local Rules 24-503 Clearing Agency
Requirements and Related Companion Policies
July 17, 2014
Introduction
Staff of the Canadian Securities Administrators (the CSA or we) are publishing this notice to
update the public on proposed rule-making initiatives of certain CSA jurisdictions governing
clearing agencies. On December 18, 2013, the Autorité des marchés financiers du Québec
(AMF), Manitoba Securities Commission (MSC) and Ontario Securities Commission (OSC)
each published for comment the following documents, in substantially similar form, in their
respective jurisdictions:
•
a proposed local rule 24-503 regarding clearing agency requirements (proposed Local
Rule);
1
•
a related proposed local companion policy 24-503CP (proposed CP); and
•
a notice and request for comments on the proposed Local Rule and CP (Request Notice).
In addition, concurrent to the publication of the Request Notices and proposed Local Rules and
CPs, provincial securities regulatory authorities in British Columbia, Alberta, Saskatchewan,
New Brunswick and Nova Scotia published Multilateral Staff Notice 24-309 (the Multilateral
Notice).
2
The purpose of the Multilateral Notice was to inform the public that such authorities
had also begun the development of, and intended to publish at a later date, a proposed
multilateral instrument substantially similar to the proposed Local Rules.
The proposed Local Rule has several purposes. It sets out certain requirements in connection
with the application process for recognition as a clearing agency under securities legislation (or
for an application to be exempt from the recognition requirement). Guidance on the regulatory
approaches to applications for recognition or exemption is set out in the proposed CP. The
proposed Local Rule also sets out on-going requirements for recognized clearing agencies that
act as, or perform the services of, a central counterparty (CCP), central securities depository
(CSD) or securities settlement system (SSS). These requirements are based largely on
international standards applicable to financial market infrastructures (FMIs) set out in the April
2012 report Principles for financial market infrastructures (as the context requires, the PFMIs or
1
The proposed Local Rules that were published for comment are the following: AMF Regulation 24-503 Respecting
Clearing House, Central Securities Depository and Settlement System Requirements; MSC Rule 24-503 Clearing
Agency Requirements; and OSC Rule 24-503 Clearing Agency Requirements.
2
The Multilateral Notice can be found on certain websites of such authorities. In British Columbia, for example,
see: https://www.bcsc.bc.ca/Securities_Law/Policies/Policy2/24-
309_Publication_of_Clearing_Agency_Requirements_in_Ontario__Quebec_and_Manitoba__CSA_Multilateral_Sta
ff_Notice_/
1
PFMI report) published by the Committee on Payment and Settlement Systems (CPSS) and the
International Organization of Securities Commissions (IOSCO).
3
A key objective of the proposed Local Rules is to adopt, in Canada, the CPSS-IOSCO
international standards governing FMIs set out in the PFMI report. Implementation of the
standards is intended to enhance the safety and efficiency of FMIs, limit systemic risk, and foster
financial stability. It is also intended to support the work of the CSA Derivatives Committee to
develop a comprehensive regulatory framework for the trading and clearing of derivatives in
Canada.
Status Update
(a) Development of uniform Canadian requirements
In response to the Request Notices, stakeholders suggested that provincial securities regulators
take a unified approach to implementing the PFMIs. The CSA had discussed the prospect of a
national instrument prior to the development of the proposed Local Rules, but we determined
that such an approach was not feasible at the time. The CSA have reconsidered, and agree that
adoption of uniform requirements governing clearing agencies is now possible and would benefit
the markets. We propose to adopt the PFMIs across the country as a national instrument
(proposed National Instrument). Clearing agencies operating in Canada are national in scope, and
a national instrument will therefore facilitate the implementation of uniform, consistent and
transparent requirements for clearing agencies in all Canadian jurisdictions.
The CSA intend to develop the proposed National Instrument by taking into consideration the
comments received on the proposed Local Rules (see below “Summary of Comments on
Proposed Local Rules”).We expect that the proposed National Instrument will be published for a
60 day comment period in the fall of 2014.
(b) Anticipated benefits of the proposed National Instrument
As with the proposed Local Rules, the purpose of the proposed National Instrument will be to
enhance the regulatory framework for recognized clearing agencies operating or seeking to
operate in a Canadian jurisdiction. This regulatory framework will facilitate ongoing observance
by recognized clearing agencies of international minimum standards applicable to FMIs. The
CSA believe that the proposed National Instrument will support resilient and cost-effective
clearing agency operations. It will promote transparency and support confidence among market
participants in the ability of clearing agencies to provide efficient and safe clearance and
settlement services, which in turn will facilitate capital formation. Also, the proposed National
Instrument will further facilitate the efforts of Canadian CCPs to meet the “qualifying CCP”
(QCCP) status under the Basel III and Canadian banking guidelines. Canadian and foreign banks
that have certain counterparty exposures to Canadian CCPs would be subject to higher capital
requirements if these CCPs do not meet the QCCP status.
3
The PFMI report is available on the Bank for International Settlements’ website (www.bis.org) and the IOSCO website
(www.iosco.org).
2
(c) Joint supplementary guidance
As with the proposed CPs, the companion policy to the proposed National Instrument will
include supplementary guidance jointly developed by the CSA and the Bank of Canada (Bank)
for domestic clearing agencies that are regulated by CSA jurisdictions and the Bank (Joint
Supplementary Guidance). Joint Supplementary Guidance related to governance standards was
published for comment in the proposed CPs. The CSA and the Bank intend to publish for
comment further Joint Supplementary Guidance on other standards. The CSA intend to publish
for comment such further Joint Supplementary Guidance in the companion policy to the
proposed National Instrument.
Because of its importance to certain Canadian clearing agencies, the Bank has published the
Joint Supplementary Guidance related to liquidity risk on its website for a 30-day comment
period.
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We are supportive of the Bank’s publication of this guidance. We intend to re-publish
the guidance related to liquidity risk later this fall with the proposed National Instrument and
related companion policy. We would encourage prospective commenters to provide their views,
if any, during the Bank’s comment period, which expires on August 4, 2014
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so that any
feedback can be incorporated when we publish the proposed National Instrument and related
companion policy.
Summary of Comments on Proposed Local Rules
The comment period for the proposed Local Rules and CPs ended on March 12, 2014 (for the
MSC) and March 18, 2014 (for the AMF and OSC), respectively. Taken together, nine comment
letters were received by the regulators. The list of commenters is attached as Appendix “A” to
this Notice. We thank the commenters for taking the time to consider the proposed Local Rules
and CPs.
We have provided a summary of comments received on the proposed Local Rules and CPs in
Appendix “B”. As noted above, the CSA intends to carefully consider the comments in
developing the proposed National Instrument. The publication of the proposed National
Instrument and related companion policy later this fall will include responses to such comments.
The public will have an opportunity to review and comment on the proposed National
Instrument.
In general, the commenters thought that adoption of the CPSS-IOSCO standards would be a
positive step for the Canadian markets and the regulation of its FMIs. There was also general
agreement with the proposed Local Rules’ purpose and key objectives. Aside from a desire for a
uniform approach – which will be dealt with through the development of the proposed National
Instrument – some commenters requested that the PFMIs be incorporated into the rule
framework in a more direct fashion than had been proposed in the proposed Local Rules, and
that they be clearly separated from any additional requirements which are unique to the Canadian
context. We will consider how best to redraft the proposed National Instrument to more directly
4
The Bank of Canada guidance can be found at this address: http://www.bankofcanada.ca/core-functions/financial-
system/oversight-designated-clearing-settlement-systems/bank-of-canada-risk-management-standards-for-designated-fmis/.
5
See the Bank’s Notice at: http://www.bankofcanada.ca/2014/07/public-consultation-policy-guidance/
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incorporate the text of the PFMI principles and (where appropriate) their key considerations as
rule requirements. We will also consider how best to separately identify other requirements, if
any, that are in addition to the PFMIs.
The remaining comments on specific matters are summarized in the attached Appendix “B”.
Questions
Questions with respect to this Notice, or the comments attached hereto, may be referred to:
Antoinette Leung
Manager, Market Regulation
Ontario Securities Commission
Tel: (416) 593-8901
Email: aleung@osc.gov.on.ca
Maxime Paré
Senior Legal Counsel, Market Regulation
Ontario Securities Commission
Tel: (416) 593-3650
Email: mpare@osc.gov.on.ca
Oren Winer
Legal Counsel, Market Regulation
Ontario Securities Commission
Tel: (416) 593-8250
Email: owiner@osc.gov.on.ca
Michael Brady
Senior Legal Counsel
British Columbia Securities Commission
Tel: (604) 899-6561
Email: mbrady@bcsc.bc.ca
Doug MacKay
Manager, Market and SRO Oversight
Capital Markets Regulation
British Columbia Securities Commission
Tel: (604) 899 6609
Email: dmackay@bcsc.bc.ca
Heather Forester
Legal Counsel
Alberta Securities Commission
Tel: (403) 592-3055
Email: heather.forester@asc.ca
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Paula White
Manager Compliance and Oversight
Manitoba Securities Commission
Tel: (204)-945-5195
Email: paula.white@gov.mb.ca
Claude Gatien
Director, Clearing houses
Autorité des marchés financiers
Tel: (514) 395-0337 extension 4341
Toll free: 1 877 525-0337
Email: claude.gatien@lautorite.qc.ca
Martin Picard
Senior Policy Advisor, Clearing houses
Autorité des marchés financiers
Tel: (514) 395-0337 extension 4347
Toll free: 1 877 525-0337
Email: martin.picard@lautorite.qc.ca
Liz Kutarna
Deputy Director, Capital Markets, Securities Division
Financial and Consumer Affairs Authority of Saskatchewan
Tel: (306) 787-5871
Email: liz.kutarna@gov.sk.ca
Susan Powell
Deputy Director, Securities
Financial and Consumer Services Commission (New Brunswick)
Tel: (506) 643-7697
Email: Susan.Powell@fcnb.ca
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APPENDIX “A” TO CSA NOTICE 24-310
Status update on proposed Local Rules 24-503 Clearing Agency Requirements and related
companion policies
List of Commenters
Canadian Investor Protection Fund
Canadian Life and Health Insurance Association Inc.
CME Group Inc.
IGM Financial Inc.
Investment Industry Association of Canada
LCH.Clearnet Group Ltd.
RBC Global Asset Management Inc.
TMX Group Ltd. (on behalf of all its subsidiaries)
TMX Group Ltd. (on behalf of its financial market infrastructures: Canadian Derivatives
Clearing Corporation, The Canadian Depository for Securities Limited, and Natural Gas
Exchange)
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APPENDIX “B” TO CSA NOTICE 24-310
Status update on proposed Local Rules 24-503 Clearing Agency Requirements and related
companion policies
Summary of Comments
Theme/question
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Summary of comments
General
Purposes of the proposed Local Rule
One commenter disagrees with the drafting approach chosen to achieve the
and approach to drafting
purposes of the proposed Local Rule (i.e. adopting the PFMIs in a rule). The
commenter feels that differences, however modest, between the PFMIs and
the proposed Local Rule would require complex, time consuming and costly
analyses of such differences (including what, if any, non-PFMI provisions
have been added to the proposed Local Rule).
The commenter enumerates several possible consequences resulting from the
approach (which necessitates analyses of possible differences from the
PFMIs):
•
it may deter participants and clearing agencies from entering/expanding
in the Canadian market, leading to less competition, liquidity and
stability as a whole;
•
clearing agencies that have begun self-assessments according to PFMI
standards would have to reconsider the proposed Local Rule
requirements;
•
domestic clearing agencies held to more rigorous provincial
requirements than those based in foreign jurisdictions would be
disadvantaged by an uneven playing field;
•
CPSS-IOSCO implementation monitoring efforts of the PFMIs would
be confused by potentially different standards imposed on Canadian
clearing agencies;
•
foreign regulators would have difficulty assessing equivalency of the
proposed Local Rule to their own PFMIs-based requirements; and
•
assessment as a “qualifying CCP” (QCCP) could be made more difficult
and uncertain, should the Local Rule’s requirements be seen as different
from, or potentially imposing lower standards than, the PFMIs.
The commenter expresses that the stated purposes of the proposed Local
Rule could be achieved by requiring direct compliance with the international
standards, and only adding to a proposed Local Rule the additional
requirements that would be unique to a province.
Unified approach to rule-drafting
A commenter is concerned that the complexity of analyzing the differences
between the proposed Local Rule and the PFMIs would be magnified by the
impact of each jurisdiction enacting its own rule. The commenter calls for a
unified approach to drafting and implementing the proposed Local Rule
amongst the provincial/territorial regulators.
6
A reference to a provision (i.e., section, subsection, paragraph, etc.) is a reference to a provision of the proposed
Local Rule, unless otherwise indicated.
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Theme/question
6
Summary of comments
Requirements pursuant to existing
One commenter says that it was unclear whether certain recognized/exempt
terms and conditions
clearing agencies would be required to continue to comply with an existing
term and condition that requires compliance with the PFMIs, possibly in
addition to the proposed Local Rule.
Foreign-based entities’ compliance
A commenter is concerned that the proposed Local Rule is not clear whether
with proposed Local Rule, and
foreign-based clearing agencies that are recognized in a province will be
equivalence and mutual recognition
required to comply with all new provisions, or may continue to abide by
approaches
terms and conditions in their existing recognition orders. The commenter
notes that adhering to the proposed Local Rule’s Part 3 provisions would be
duplicative and inefficient when considering the regulation in a home
jurisdiction, whereas current terms and conditions already address the
balance with the home jurisdiction’s regulation.
Two commenters highlight a need for access to third-country markets /
clearing agencies under the concepts of equivalence and mutual recognition.
One commenter suggests that an equivalence test be based on transparent,
proportionate, fair and objective grounds, and should be judged on an
outcome-determinative basis that looks to the PFMIs for guidance, so as to
recognize the differences in legal and regulatory structures around the world.
The commenters advocate for a process similar to the EMIR scheme for the
recognition of third country CCPs, which relies on an equivalence
assessment of the home country’s legal and regulatory structure and an
MOU between ESMA and the relevant regulator. The commenters also note
that terms and conditions would have to be appropriate in light of the
supervision and oversight being carried out in multiple jurisdictions, and that
reliance should be placed on the regulations in the home jurisdictions to
implement the PFMIs in place of direct application of CSA requirements on
third country CCPs.
Part 2: Clearing agency recognition or exemption from recognition
Request Notice question 1: Are
A commenter notes that the proposed definition should include (a) the extent
there other factors that could be
to which failure of a clearing agency would require the use of public funds to
considered in determining systemic
maintain the stability of Canada’s financial infrastructure, and (b) the impact
importance of a clearing agency to
a clearing agency failure would have on Canada’s financial infrastructure.
the relevant province? If so, please
describe such factors and your
A commenter notes that it would be useful to view the criteria within the
reasons for including them.
context of the currencies in which an FMI’s obligations are denominated,
since any effects in Canada may depend on the value of an FMI’s CDN
Subsections 2.0(2)-(5) of the
dollar-denominated transactions.
proposed CP – systemic importance
A commenter suggests that the linkages between the clearing agency and
other CCPs should be considered, including instances in which they assume
exposure to one or more CCPs, as well as how such exposures are managed.
A commenter suggests that any risk exposure of the clearing agency to
counterparties that are not residents of a relevant province but are
systemically important to those residents should be considered.
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Theme/question
6
Summary of comments
A commenter highlights the absence of an appeal mechanism for parties who
wish to have their determination of systemic importance reviewed.
Significant changes and other
A commenter notes that the advanced approval requirement for significant
changes in information
changes and notification of fee changes is inconsistent with international
regulations and thus puts domestic clearing agencies on an uneven playing
Section 2.2
field relative to foreign-based clearing agencies, who may make such
changes more quickly. The commenter describes that CFTC regulations for
derivatives clearing agencies, for example, require only self-certification of
rule changes with the CFTC 10 business days in advance of the change. The
commenter requests aligning the requirements with those of the CFTC.
Filing of initial audited financial
A commenter notes that while it plans to adopt the use of IFRS in the near
statements
future, it currently prepares its financial statements in accordance with UK
GAAP, as per its home regulator’s requirements. It requests confirmation
Section 2.4
that the provincial/territorial regulators will flexibly implement s. 2.4 to
allow conformation with local regulatory requirements and that the provision
will not negatively impact its operations in the relevant province.
Filing of annual audited and interim
A commenter urges the provincial/territorial regulators to extend the
financial statements
approach taken under s. 2.2 – to allowing alternate means to meeting the
provision’s requirement for foreign-based entities, as specified in its
Section 2.5
recognition/exemption order – to the requirements of s. 2.5. The commenter
notes that some home country regimes do not require interim financial
statements to be audited.
Part 3: On-going requirements applicable to recognized clearing agencies
Section 3.2 – Governance
Joint Supplementary Guidance Box
A commenter felt that the statement “the FMI functions should be legally
2, Item 1
separated from other functions performed by the consolidated entity in order
to maximize bankruptcy remoteness of the FMI functions” does not align
Subsection 3.2(2) of the proposed
with the PFMIs paragraph 3.2.6. The commenter interprets that the PFMIs
CP
describe legal separation as a consideration when services present a distinct
risk profile from, or pose additional risks to, its existing functions. So,
whereas legal separation may be effective for multi-functional risks on a
case-by-case basis, it is just one mechanism, in addition to, for example,
effective governance and containment of risk through contractual terms.
Role of the chief compliance officer
A commenter feels that the requirement could impose significant effort and
cost on a clearing agency registered in multiple jurisdictions. Alternatively,
Paragraph 3.2(7)(d)
the commenter proposes that recognized foreign clearing agencies be able to
leverage similar information/reports provided to other regulators or
information in its CPSS-IOSCO FMI Disclosure Framework Document.
Transparency of major decisions
A commenter proposes that, before a major decision that has a potential
broad market impact is published, the clearing agency should be permitted to
Subsection 3.2(13)
make a case for non-publication on the grounds of possible negative impact
to financial stability in any of the jurisdictions in which it operates. Also, the
publication should be made only with the approval of a relevant home-
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Theme/question
6
Summary of comments
jurisdiction regulator and/or regulator of any other impacted jurisdiction.
A commenter also notes that it would make sense that ss. 3.2(13) should
only apply to determinative decisions of a clearing agency’s Board, since
other (more preliminary or interim) resolutions may be confusing,
misleading or inappropriately market-moving.
Section 3.5 – Collateral and Section 3.7 – Liquidity risk
Collateral – general principle
A commenter says it is essential that letters of credit be perceived as
permitted collateral, notwithstanding that the wording of the provision does
Subsection 3.5(1)
not specifically suggest otherwise. The commenter requests positive clarity
that letters of credit are intended to be included.
Collateral and liquidity risk
A commenter requests flexibility in the eligible collateral a clearing agency
can accept, as certain financial industries, such as the life insurance industry,
Sections 3.5, 3.7
tend to hold long-dated corporate securities to support the long-term nature
of their activities. The commenter suggests that such participants would
incur significant costs in obtaining more liquid assets to post as collateral
with a clearing agency. It requests that long term assets, such as high grade
corporate bonds, be considered eligible.
Qualifying liquid resources
With respect to par. 3.7(8)(a), a commenter notes that there is minimal
liquidity risk with respect to major currencies and any potential concerns
Subsections 3.7(8) and (9)
could be addressed through a foreign haircut allowance, if necessary. The
commenter interprets that PFMIs paragraph 3.7.10 contemplates holding
liquid resources in more than one currency, but does not strictly require that
the currency of liquid resources must exactly match the currency of the
obligations. Further, if highly marketable collateral held in investments are
permitted, given the standardization and marketability of major currencies, it
does not seem reasonable to require that cash must be held in the same
currency of the obligation.
With respect to par. 3.7(8)(b), a commenter requests that committed lines of
credit be expanded to include letters of credit, as they are committed
obligations of an underwriting bank.
With respect to par. 3.7(8)(e) and the posting of bonds as collateral, a
commenter notes that it is not clear what is included as “highly marketable
collateral” or what funding arrangements would qualify as prearranged and
highly reliable. The commenter is concerned that should customers not be
able to post bonds as collateral with clearing members, because they in turn
cannot post bonds to a clearing agency, customers or clearing members will
be required to enter into repurchase transactions to raise cash to post, which
may impose additional costs without reducing systemic risk.
Section 3.13 – Participant default rules and procedures
Use and sequencing of financial
A commenter asserts that it is not practical for a clearing agency to pre
resources
commit to use particular liquidity resources in a specific order; rather the use
of various resources to meet time-sensitive needs will depend on the details
Subsection 3.13(3)
of a default situation. Also, the inclusion of such a hierarchy in publicly
disclosed rules (or only to members) could make the clearing agency
vulnerable to gaming by market participants. Accordingly, any plan for using
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Theme/question
6
Summary of comments
liquidity resources should remain confidential, or at least disclosed only at a
high level.
Testing of default procedures
A commenter requests that only entities that clear positions for their clients’
futures commission merchant (FCM) services or that are involved in loss
Subsection 3.13(6)
mutualization be involved as the required participants and stakeholders for
the testing of a clearing agency’s default rules and procedures. The
commenter explains that for clearing members of a private, non-mutualized
clearing agency, clearing members are clearing for their own accounts, and
do not provide services typically afforded by FCMs. Accordingly, in the
event of a default and close out, non-defaulting participants are neither
impacted nor included in the process. As such, these members are unwilling
to, and see little value in being involved in the testing and review of relevant
procedures.
Use of own capital
A commenter expresses that, while the PFMIs contemplate that an FMI
using its own resources is an option for the management of a default, it is not
Subsection 3.13(8)
actually required. Further, while the proposed Local Rule may require ‘skin
in the game’ to motivate a clearing agency to act in a manner that would
minimize loss and risk to all, given the reputational risk the clearing agency
has at stake as the market watches its response to a default, it is unnecessary
to add any additional motivating factor.
Section 3.14 – Segregation and portability
General comments
A commenter expresses concern that, in the context of a securities firm
insolvency, the application of Principle 14 to all markets may impede or
negate the ability of a trustee in bankruptcy, as well as investor protection
funds, from returning the firm’s client funds, and will only move the
Canadian framework closer to the US model, in spite of the well-received
Canadian performances to date. Whereas collateral would have to be held on
a gross basis by the CCP, CIPF coverage would be impacted because assets
held at the CCP would not vest with the CIPF trustee. Indeed, the principle
of pooling assets for pro-rata distribution – the cornerstone of Part XII of the
Bankruptcy and Insolvency Act – would no longer be applied to all clients.
A commenter notes that in the particularly complex area of open futures
positions, the application of Principle 14 would negatively affect the ability
of CIPF to provide customer protection, if the CCP has custody of clients’
assets and it does not vest in a trustee.
A commenter expresses concern about the impact to IIROC members when
applying Principle 14. Such members would not have the same degree of
collateral available to them for their use, where there is a different margin
requirement by the CCP vs. the clearing member.
A commenter expresses concern about the operational issues and impacts
related to a CCP undertaking the responsibility to move client assets,
especially because the CCP may not have client account information which
is held by a clearing member.
Customer account structures and
A commenter suggests to replace “or” with “and/or” to accommodate
transfer of positions and collateral
clearing members who clear for a combination of clients that include both
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Theme/question
6
Summary of comments
individual and omnibus accounts.
Subparagraph 3.14(4)(a)(ii)
Request Notice question 2: Do you
Three commenters argue that CCPs serving the cash markets should not be
agree with the current drafting
required to obtain an “exemption” from section 3.14, as the wording of
approach of section 3.14 of the
Principle 14 should be understood to allow, as a matter of course, the
Rule, i.e., requiring all CCPs to
application of its “alternate approach” to cash market CCPs that provide the
meet Principle 14 in its entirety
same protections as those envisioned by the Principle (as explained in PFMIs
(without referencing the alternate
paragraph 3.14.6). The commenters express that an “exemption” may imply
approach), and granting exemptions
that the CCP employs a weaker approach to investor protection than that
on a case-by-case basis to those
which is otherwise required by the PFMIs.
CCPs for which the alternate
approach is appropriate?
A commenter is unsure whether timely portability could be achieved without
supporting legislation to ensure a release of funds within a certain period.
Request Notice question 3: Should
Three commenters conclude that cash market CCPs should be able to
all CCPs serving the Canadian cash
demonstrate how they fit within the alternate approach, if they satisfy the
markets be able to avail themselves
criteria set out in paragraph 3.4.16 of the PFMIs. The combination of IIROC
of the alternate approach to
rules, CIPF customer protection (that extends to all assets held in a
implementation of Principle 14?
customer’s account, including securities, cash balances, commodities,
How could such CCPs demonstrate
futures contracts, segregated insurance funds or other property) and the Part
that customer assets and positions
XII Bankruptcy and Insolvency Act scheme, in the Canadian regulatory
are protected to the same degree
environment should be conducive to satisfying this alternate approach. At
envisioned by Principle 14?
least one commenter feels that the alternate approach should extend to all
CCPs not serving the OTC derivatives markets.
Two commenters argue that unintended consequences would be severe if
CCPs serving markets other than the OTC derivatives markets were not able
to avail themselves of the alternate approach.
A commenter describes several consequences that might arise if the alternate
approach is unavailable for non-OTC market CCPs: (1) the efficiencies
achieved by netting trades would be lost as segregation and portability
requirements would force CCPs to decompose netted trades, thereby
increasing costs to the CCP and reducing the risk reduction provided by
netting; (2) costly changes would be required to the CCP’s margining
system, in order to margin positions at a gross level; (3) for CCPs without
cross-product margining, the introduction of portability could result in higher
margin requirements for legitimate market activity; (4) CCPs would have to
develop a communication mechanism to inform investors of their
collateral/positions in the event of a CCP participant insolvency; and (5)
market participants would be negatively impacted by having to undertake
significant reconciliation efforts, as each trade would have to be individually
inspected to note the client and its corresponding collateral.
A commenter suggests that CCPs could demonstrate their protection of
customer assets and positions through disclosure of: (i) the nature of the
information held in respect of individual clients; (ii) the roles and
responsibilities of surviving participants under default scenarios; and (iii) the
processes and procedures to be followed by the CCP and its surviving
participants in these circumstances. It is also suggested that for CCPs
obligated to test default management processes, the processes enabling
portability of positions and collateral should also be tested.
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Theme/question
6
Summary of comments
Section 3.15 – General business risk
Determining sufficiency of liquid
A commenter requests that the last sentence of PFMI key consideration 15.3
net assets
be included in section 3.15(3) in order to avoid duplicate capital
requirements by permitting the inclusion of equity held under international
Subsection 3.15(3)
risk-based capital standards, where appropriate.
Section 3.16 – Custody and investment risks
Investment strategy
A commenter is concerned that public disclosure of its investment strategies
could negatively impact its ability to invest large amounts of cash on a daily
Subsection 3.16(4)
basis. It requests that investment strategies only be disclosed at a high level
and only to participants.
Section 3.17 – Operational risks
Operational capacity, systems
A commenter suggests that an alternative should be available for foreign-
requirements, and incident
based recognized clearing agencies. It requests that this alternative be
management
provided in the clearing agency’s recognition order or ‘notice and approval
protocol’.
Paragraph 3.17(5)(e)
Operational capacity, systems
A commenter requests that public disclosure under these subsections not
requirements, and incident
include detailed proprietary information.
management
Subsections 3.17(8), (9)
Operational capacity, systems
In respect of paragraph (b), one commenter suggests that the provision
requirements, and incident
should allow a foreign-based recognized clearing agency to meet the
management
requirement in a manner described in the terms and conditions of its
recognition order or ‘notice and approval protocol’.
Subsection 3.17(11):
In respect of paragraph (c), one commenter expresses concern that the scope
of this disclosure requirement is too broad. It suggests that it be narrowed to
only include non-sensitive information that is not proprietary in nature.
Request Notice question 4: What are
A commenter requests further clarity with respect to whether (i) the ability of
a clearing agency’s current abilities
a clearing agency to meet the two hour requirement would impact how the
and future prospects to meet the
requirement is applied, and (ii) whether more than two hours may be
objective of recovering and
permitted, if necessary. The commenter notes that the proposed timeframe
resuming critical systems and
appears arbitrary and may not be the appropriate recovery objective in
processes within two hours of a
Canada.
disruptive event? Should recovery
and resumption-time objectives
A commenter notes that recovery and resumption time objectives should not
differ according to critical
differ from market to market, based on critical importance.
importance of markets?
Subparagraph 3.17(12)(c)(i)
Section 3.19 – Tiered participation arrangements
Request Notice question 5: To what
A commenter requests further clarity as to whether (i) the ability of the
extent can a CCP identify and gather
clearing agency to meet the requirement would impact how the requirement
information about a tiered (indirect)
is applied, and (ii) the type and extent of the information that would be
participant?
required to be gathered.
Section 3.19
A commenter submits that it is challenging for Canadian CCPs to identify or
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Theme/question
6
Summary of comments
gather meaningful information pertaining to indirect/tiered participants, due
to the lack of legal or other contractual relationship between the CCP and the
indirect participant, and more generally, because Canadian clearing models
are founded on the ‘principal model’. The model utilizes omnibus account
structures which enable the CCP to distinguish proprietary and client assets,
but more granular detail would be needed to permit the CCP to identify and
measure the activity of indirect participants. CCPs have limited recourse to
require the necessary information disclosures from indirect participants.
A commenter notes that CCPs are able to gather sufficient information about
their indirect participants to be able to manage the risks they pose.
Request Notice question 6: In
A commenter agreed that all cited risks are present in tiered participation
Canada, what types of risks (such as
arrangements.
credit, liquidity, and operational
risks) arise in tiered participation
arrangements between customers
and direct participants or between
customers and other intermediaries
that provide clearing services to
such customers?
Request Notice question 7: How can
A commenter described that the control, mitigation and management of risks
a clearing agency properly manage
would require, at a minimum, the disclosure of client accounts and/or
the risks posed by tiered
securities positions by direct CCP participants. Doing so would allow the
participation arrangements?
CCP to meet the minimum standards of Principle 14 and would allow a CCP
to modify or calibrate its risk model towards the effective management of the
credit and liquidity risks that tiered participants introduce to the clearing
system.
A commenter suggests two layers of controls to help manage risks posed by
tiered participation arrangements: (i) require the clearing agency to gather
detailed information on the direct participant’s customer activity in order to
identify relationships and positions at the indirect participant level, and (ii)
require the clearing agency to act on the information within a risk policy
framework that identifies, signals and monitors risks and risk concentrations
and which, where appropriate, provides incentives for participants to reduce
these risks and concentrations.
Section 3.23 – Transparency
Changes to rules and procedures
A commenter requests that a clearing agency’s disclosure of changes to its
rules and procedures be limited to only what is required by its recognition
Subsection 3.23(5)
order or ‘notice and approval protocol’. It also expresses its belief that
disclosure should be limited to services over which the regulatory authority
possesses jurisdiction.
Part 5: Effective dates and transition
Section 5.1
A commenter requests that, where a clearing agency has already carried out
preparatory work or has dedicated resources to PFMIs implementation plans
(that have been approved by its regulators), the transition periods should take
such efforts into account. The commenter also requests that where the CSA’s
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Theme/question
6
Summary of comments
implementation of the PFMIs differ from CPSS-IOSCO, that the CSA
provide a mechanism through which PFMI requirements that are
substantively similar to the CSA requirements be grandfathered under the
proposed Local Rule.
In respect of the interaction of CSA Staff Notices 91-303 and 91-304, one
commenter notes that there are significant operational implications and
unknowns for customers, in terms of setting up procedures to deal with
derivatives clearing agencies (DCAs) and clearing members. Accordingly,
there will need to be transition time once DCAs are established and before
all clearing requirements are implemented. The commenter also expresses
concern that it is unclear how many DCAs will exist and how they will be
differentiated, leading to the possibility that transactions that would
otherwise net to zero may be required to clear at different derivatives
clearing agencies, thereby resulting in exposures that are not being offset.
Subsection 5.1(2)
A commenter suggests that sections 3.4-3.7 should have the same effective
date as CSA Staff Notices 91-303 and 91-304 in order to ensure customers
have the protection of risk management tools when clearing trades.
Request Notice question 8: Are the
A commenter notes that successful implementation under the proposed
above transition periods
timeline may be difficult.
appropriate? If yes, please give your
reasons. If not, what alternative
transition periods would balance the
CPSS-IOSCO’s expectation of
timely implementation of the PFMIs
and the practical implementation
needs of our markets?
Subsection 5.1(3)
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