As set out in the notice accompanying the Proposed National Instrument, OTC derivatives clearing currently takes place outside of Canada, most likely through clearing intermediaries located in the United States and Europe. In the United States, we understand that the CFTC regulations set forth customer protection standards for swaps, commonly known as the “LSOC”, or “LegalSegregation with Operational Commingling”. The standards generally affect cleared swaps customer positions and related collateral and are intended to reduce the risk from other customers of the clearing agency and protect collateral in the event of certain defaults. Canadian participants in the US derivatives market would equally be subject to such US clearing agency protections, and as a result, the concept of substituted compliance is extremely important for the efficient functioning of the derivatives markets.
Overview of the Council’s Comments:
We are strongly supportive of the initiatives taken by the CSA to transform the former Model Rule into a harmonized National Instrument across Canada, in order for market participants to operate efficiently across the country.