Canadian Securities Administrators (CSA) have proposed new rules that would require some over-the-counter derivatives to be centrally cleared.
The CSA proposal is similar to rules being considered by the European Securities and Markets Authority (ESMA) in combining two approaches to defining which instruments must be cleared: a bottom-up approach through which OTC derivatives that a central counterparty (CCP) clears or proposes to clear become subject to a mandatory clearing requirement, and a top-down approach, whereby provincial Canadian regulators have the power to select derivatives for mandatory central clearing, regardless of whether a CCP clears such instruments.
The process for choosing which instruments must be cleared is important because, as the proposal concedes, some derivatives are so illiquid that requiring them to be centrally cleared would force CCPs to choose between imposing substantial margin requirements or taking on excessive risk.
The CSA will accept public comment on the proposed rules until September 21.
