The Canadian Securities Administrators (CSA) published a staff notice on February 9, 2017 highlighting the initiatives regulators have taken to enhance segregation and portability arrangements for the exchange-traded derivatives markets in Canada following the CSA’s advanced notice of its adoption of National Instrument 94-102 Derivatives: Customer Clearing and Protection of Customer Collateral and Positions (NI 94-102). NI 94-102 implements a segregation and portability regime to protect customer collateral and positions in the over-the-counter derivatives markets.
Since 2015, the CSA have engaged industry stakeholders to determine an appropriate central counterparty segregation and portability model for domestic futures markets. Industry stakeholders, as well as the regulators, have demonstrated support to enhance segregation and portability arrangements through a gross-customer margin (GCM) model.
The GCM model requires daily submission of customer level position data to a derivatives clearing organization (DCO). Unlike the net margin system, the GCM model does not allow futures commission merchants to offset positions of one customer with those of its other customers and submit margins that cover the netted amount. The GCM model has gained support by the industry participants as it will enhance customer protection, especially by strengthening the ability to port customer positions and collateral in the event of a clearing participant default. Furthermore, the GCM model may also reduce systemic risk by bolstering confidence that losses related to counterparty risk will be managed by eliminating the ability to offset margins by netting long and short positions when submitting margins to a DCO.
The GCM model has already been adopted by the Canadian Derivatives Clearing Corporation (CDCC) and ICE Clear Canada Inc. However, the CSA have indicated that they do not intend to impose a GCM model at this time, citing that implementing a GCM framework would be inconsistent with the principled approach taken by the clearing agency requirements in NI 24-102. Moreover, if the CSA were to implement a GCM model, it may require changes to certain dealer member rules under the Investment Industry Regulatory Organization of Canada (IIROC) and the Canadian Investor Protection Fund regime currently in place.
The CSA have indicated that they will continue to meet regularly during 2017 to discuss proposed new or amended IIROC or CDCC rules. In the event the CSA decide to implement new rule changes, such changes would be subject to a public comment process and regulatory approval by CSA members.