Ottawa has yet to deliver a verdict on Canada’s decision for swap clearing, but behind the scenes the banks are forging ahead with their own plans.
For months, even years, now, the government has been studying whether it makes sense for Canada to create its own central clearing system for swaps. Such a system is necessary under Dodd-Frank, and has been pressed for ever since Lehman Brothers collapsed. That bankruptcy made it clear that under the current model, no one ever knows how much exposure the banks and dealers have to each other through credit default swaps.
The word is that Ottawa finished its review long ago and has more or less made up its mind, but is scared to be the first-mover with a decision. It would rather wait to see what the U.S. does.
However, should the U.S. move, there could be a tight timeline for implementing a system. For that reason, some Canadian banks are now experimenting with a U.S-based central clearing system, and are in constant contact with the Depository Trust & Clearing Corporation, which is overseeing the trials.
But this experimentation could be about more than just being diligent. There are rumours that Ottawa has decided it wouldn’t make sense to create its own clearing system, and the banks know this.
Or they’re simply putting up a fight. The rules south of the border dictate that any American swap must cleared within U.S. borders. So if a bank here does a cross-border swap, only half of it can be cleared in Canada. That cuts out a lot of business. And because Canada already isn’t a very big market, there are real worries that the banks wouldn’t have enough scale to make a Canadian clearing system affordable.
That being said, the final verdict could come out very different. But the banks aren’t betting on it.