The Office of the Superintendent of Financial Institutions has issued a draft version of new capital requirements for segregated fund guarantees. The new requirement is planned to come into effect at the end of 2005.

OSFI says that the revisions have been made to reflect recent market experience, and to correct an error in the margin offset adjustment. At the same time, the format of the requirement has been changed: there is now a specific factor for each combination of policy characteristics. Comments on the draft guideline are due by May 25.

In 2000, OSFI amended the MCCSR Guideline to include a capital requirement for the risk associated with investment or performance-related guarantees on segregated funds. It notes that the factors contained in the current requirement were calibrated to the returns of the Toronto Stock Exchange Index between 1956 and 1999, “Thus, they reflect the large increase in stock prices that occurred from 1996 to 1999, but do not reflect the subsequent declines that occurred in 2000 and after.”

“Since higher stock returns decrease the likelihood that a company will be required to make a payment under an investment guarantee, the calculation underestimates the capital required,” OSFI says.

The objective in revising the guideline is to correct the error and update the requirement for segregated fund guarantees so that companies maintain levels of capital that are sufficient, in the current market environment, to cover all of the associated risks, OSFI notes.