The country's largest securities regulator has finalized the first set of sweeping rules that will dictate how over-the-counter derivatives will be governed in Canada.
Following G20 commitments inked in 2009, when the federal government agreed to things such as mandatory derivatives clearing, the Ontario Securities Commission met with myriad industry players and regulators to suss out best practices for derivatives regulation. Those efforts ramped up in the past year, and the OSC has now released its final guidelines for when and how these opaque derivative trades must be reported.
To start, the new rules determine precisely what kind of derivatives will be regulated. While that may seem like a simple question to answer, the term 'derivative' is thrown around quite loosely. For the most part, the OSC's guidelines pertain to things like interest rate swaps, foreign exchange forward contracts and credit default swaps.
Examples of things that do not fall under the umbrella include commodity forward contracts, provided that physical delivery of the commodity is intended, and gaming and insurance contracts that are already regulated by a domestic or an equivalent foreign regulatory regime.
The OSC also mandates that for derivatives that meet its definitions, their trades must be reported to special "trade repositories," that will keep track of everything outstanding in the market. Such records are necessary because one of the biggest problems during the financial crisis was that no one could see just how big the web of derivatives interconnecting the likes of Lehman Brothers and AIG really was.
OSC derivatives director Kevin Fine said that more is coming down the pipe, particularly draft rules on how derivatives must be cleared, which are expected to come out in the very near future. Figuring out the clearing process is a much more complicated task. "There has been acceptance in the market, particularly among the dealers," regarding derivative trade reporting, he said, but there are still a number of key issues to figure out when it comes to clearing.
However, it is not as though Canadian dealers aren't already voluntarily clearing some of their derivatives trades. It's just that they are some battles over what the final legal framework should say.
To date, Canada has been a bit slower on derivatives regulation that its major Western partners, but the new trade reporting framework is a big step forward. The U.S. already implemented its trade reporting rules, and Europe's kick in early next year. Canada's become law just a few months later.
Tim Kiladze