The Canadian Securities Administrators (CSA) have taken steps to postpone until August 20, 2018 the phase-in date of the mandatory clearing requirements set out in National Instrument 94-101 Mandatory Central Counterparty Clearing of Derivatives (NI 94-101) for certain categories of counterparties. The delay in the application of the rule to these counterparties will not affect transactions and counterparties that are already subject to mandatory clearing requirements under NI 94-101. For background on NI 94-101, see our January 2017 Blakes Bulletin: Canadian Regulators Finalize Mandatory OTC Derivatives Clearing Rules.
Under NI 94-101, prescribed interest rate swaps and forward rate agreements are subject to mandatory clearing if at least one party to the transaction is a local counterparty in Canada and each party to the transaction fits within at least one of the following categories:
A participant (i.e., a clearing member) in a regulated clearing agency that subscribes for clearing services for the applicable class of derivatives (Clearing Agency Participant)
An affiliate of an entity that is a Clearing Agency Participant if the affiliate has had in excess of C$1-billion gross notional of outstanding OTC derivatives as determined for any month-end following the entry into force of the rule, excluding intragroup transactions (Participant Affiliate)
A local counterparty that (together with its local counterparty affiliates) has had in excess of C$500-billion gross notional of outstanding OTC derivatives as determined at any month-end following the entry into force of the rule, excluding intragroup transactions (Large Counterparty)
During the delay, Participant Affiliates and Large Counterparties that are not Clearing Agency Participants will not be subject to mandatory clearing of in-scope OTC derivatives trades. Consequently, prior to August 20, 2018, only Clearing Agency Participants — essentially, certain major banks and derivatives dealers — will be subject to the mandatory clearing requirements of NI 94-101.
Purpose of the Delay
The delay will allow regulators to consider whether the scope of NI 94-101 as drafted extends clearing obligations too broadly, including based on affiliate relationships. For example, the Ontario Securities Commission has indicated in its notice that the definition of “affiliate” and the meaning given to “control” in NI 94-101 could result in investment funds and special purpose vehicles organized as trusts or partnerships, and managed by unrelated managers, being subject to mandatory clearing. Absent the delay, Participant Affiliates and Large Counterparties would have become subject to the mandatory clearing requirement beginning October 4, 2017.
It is expected that regulators will seek industry feedback regarding further clarifications to the scope of entities that are to be subject to the rule in advance of the August 20, 2018 phase-in date.
We wish to acknowledge the contribution of Paul Rand to this publication