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Uncleared OTC derivatives market seen plunging

If you believe that central clearing means safety in derivatives trading, then Canada’s over-the-counter derivatives market is about to get a lot less risky.

The Bank of Canada’s Financial System review, in a look at clearing and margin requirements in derivatives, finds that about one-third of the $17-trillion in notional over-the-country derivatives outstanding at big Canadian banks are centrally cleared these days. Most of that is in the interest-rate derivatives business, which is the biggest. For other asset classes (equity derivatives, foreign exchange), central clearing barely registers. The breakdown between what is cleared and what is not roughly mirrors the global experience. That balance is set to shift dramatically, in Canada and globally. But the shift in Canada will be larger.