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Derivatives Update: A New Customer Clearing Rule and Changes to the Quebec Derivatives Regulation

New Customer Clearing Rule

The Canadian Securities Administrators (CSA) has published for comment proposed National Instrument 94-102 - Derivatives: Customer Clearing and Protection of Customer Collateral and Positions (NI 94-102) and its related proposed Companion Policy 94-102CP (the Proposals). The Proposals replace the Proposed Model Provincial Rule on Derivatives: Customer Clearing and Protection of Customer Positions and Collateral published by the CSA in 2014 (the Model Rule).

In the Notice published concurrently with the Proposals, the CSA states that Canadian and international initiatives promoting the clearing of over-the-counter (OTC) derivative transactions will cause market participants, which are not clearing members at a derivatives clearing agency, to clear their OTC derivative transactions indirectly through clearing members. The purpose of the Proposals is to ensure that customer clearing is carried out in a manner that protects customer collateral and positions and improves derivatives clearing agencies’ resilience to a clearing member default.

A market participant may either have direct access to a derivatives clearing agency’s services by becoming a member of the clearing agency; or have indirect access to clearing services by using a clearing intermediary which is itself a member of the clearing agency (in Canada, typically a Canadian bank or a derivatives dealer). The market participant will be required to post collateral with either the clearing agency or the clearing intermediary, and it is such market participant’s posted collateral that the CSA wishes to protect (referred to as customer collateral below). As a result, the Proposals impose obligations upon derivatives clearing agencies and clearing intermediaries.

Such new obligations include requirements relating to the treatment of customer collateral by clearing intermediaries and derivatives clearing agencies, including obligations relating to the segregation and use of customer collateral as well as detailed record-keeping, reporting and disclosure requirements intended to ensure that customer collateral and positions are readily identifiable.

The Proposals also contain requirements relating to the transfer or porting of customer collateral and positions by derivatives clearing agencies intended to ensure that, in the event of default or insolvency of a clearing intermediary, customer collateral and positions can be transferred to one or more non-defaulting clearing intermediaries without having to liquidate and re-establish the positions.

Key features of the Proposals include:

  • Acceptable clearing models. NI 94-102 would allow a wide range of customer clearing models. In order to ensure adequate customer protection, this enhanced flexibility would be counterbalanced by an approval and oversight process for recognized or exempted clearing agencies (either, a regulated clearing agency) involving a thorough review of the customer safeguards provided by each clearing agency offering customer clearing in a jurisdiction of Canada.
  • Multiple clearing intermediaries. Multiple clearing intermediaries would be permitted to be involved in a customer cleared transaction and each clearing intermediary involved in such a transaction would be subject to the requirements of NI 94-102.
  • Substituted compliance. The Proposals allows clearing intermediaries and regulated clearing agencies located in foreign jurisdictions to be exempted from compliance with NI 94-102 under certain circumstances when they comply with similar legislation in their own jurisdiction.
  • Enhanced customer protection. The Proposals impose robust collateral and record keeping obligations upon a clearing intermediary or regulated clearing agency: including that (i) customer positions be fully collateralized on a gross basis at the regulated clearing agency level; (ii) customer collateral held by a clearing intermediary or a regulated clearing agency be segregated from the assets of such clearing intermediary or regulated clearing agency; (iii) the regulated clearing agency and clearing intermediaries keep records that identify customers and their positions to facilitate porting, which plays a key role in the event of a clearing intermediary default or insolvency; and (iv) restrict the use and investment of customer collateral held by clearing intermediaries and regulated clearing agencies.
  • Narrowed Scope. The Proposals apply only to a clearing intermediary or foreign clearing agency when it is involved in a transaction with a customer located in a jurisdiction of Canada.[1] However, the requirements for regulated clearing agencies apply to any regulated clearing agency located in Canada for transactions with both local and foreign customers.
  • Cleared Derivative. The Proposals apply to derivatives as defined in Rule 91-506 - Derivatives: Product Determination in Manitoba, Ontario and Quebec or Multilateral Instrument 91-101 - Derivatives: Product Determination in the other provinces and territories of Canada (the Product Determination Rule) that are voluntarily cleared with a clearing agency or required to be cleared under the clearing requirement in proposed National Instrument 94-101 – Mandatory Central Counterparty Clearing of Derivatives (NI 94-101). Read more about NI 94-101.


Although the CSA expects that restrictions imposed on the use and investment of customer collateral will limit the potential revenue earned by clearing intermediaries and clearing agencies and that increased costs will be passed on to customers, it is of the view that the benefits to the market participants meaningfully outweigh its compliance cost.

Comments in writing on the Proposals are welcome until April 19, 2016.

Amendments to Quebec Derivatives Regulation

The Quebec Autorité des marchés financiers (AMF) has proposed amendments to the Derivatives Regulation (Quebec) (QDR).

Key features of the amendments include:

  • New Compliance Obligations for Hedgers relying on Accredited Counterparty OTC Exemption.


The Derivatives Act (Quebec) (QDA) provides for an exemption from the almost all of the requirements of the QDA including the derivatives dealer and advisor registration and qualified person requirements to a party which enters into OTC derivatives and qualifies in one of the categories of the definition of an “accredited counterparty” (AC Exemption) in the QDA.

One of the frequently used categories of “accredited counterparty” is a “hedger”, that is, a person who because of the person’s activities, (a) is exposed to one or more risks attendant upon those activities, including supply, credit, exchange and environmental risks and the risk related to fluctuations in the price of an underlying interest; and (b) seeks to hedge that risk by engaging in a derivatives transaction (or a series of derivatives transactions,) where the underlying interest is the underlying interest directly associated with that risk or a related underlying interest.

The amendments will impose upon a hedger relying on the AC Exemption for the first time to file with 30 days of the derivatives transaction a certificate in prescribed form with the AMF and afterwards on an annual basis. The certificate requires the hedger’s authorized officer to certify that after exercising reasonable diligence, the transaction was entered into for one of the hedging purposes set out in the prescribed form of certificate. No certificate is required if the hedger is qualified in another category of the accredited counterparty definition. A hedger using the AC Exemption must retain transaction records for the duration of the OTC derivatives transaction (or series of derivative transactions) and for another 7 years after the expiry of the transaction (or series of transactions). The AMF is also proposing concording changes to the guidance provided in its Policy Statement Respecting Accredited Counterparties.

  • Changes to the proficiency requirements for registered individuals of a derivatives advisor. New proficiency requirements will be prescribed for a chief compliance officer, advising representative and associate advising representative of a derivatives portfolio manager.
  • Broadening the scope of the exemption for foreign derivatives dealers and advisers. The current exemption from the requirement to register as a derivatives dealer or adviser under the QDR for foreign derivative dealers and advisers dealing in exchange traded derivatives with accredited counterparties authorized to carry on such activities in their home jurisdictions has been extended to exempt foreign persons authorized to create or market a derivative in their home jurisdictions from the requirements to obtain AMF authorization as a qualified person for qualified derivatives.
  • Qualified Person Authorization. The AMF proposes to amend the list of documents that a qualified person or a person applying for qualification to offer or market derivatives must file with the AMF. In addition, the AMF will require qualified persons to inform their clients of the percentage of client accounts that were profitable in the previous fiscal year.


The comment period for the QDR amendments expired February 13, 2016.

[1] A "local customer" is defined in NI 92-102 as either (a) an individual who is a resident of a jurisdiction of Canada or (b) a person that is (i) organized or incorporated under the laws of a jurisdiction of Canada (ii) has a head office in a jurisdiction of Canada or (iii) has its principal place of business in a jurisdiction of Canada.