Canadian securities regulators are publishing a set of model rules designed to facilitate the move to central counterparty clearing, which represents another step toward a new regulatory framework for over-the-counter (OTC) derivatives.

The Canadian Securities Administrators (CSA) today published for comment CSA Staff Notice 91-304 Model Provincial Rule Derivatives: Customer Clearing and Protection of Customer Collateral and Positions, which will serve as a blueprint for the various provincial regulators to craft their own rules that aim to increase the protection of customer collateral and positions, and to increase the resilience of derivatives clearing agencies.

The CSA says that the move to mandatory clearing for OTC derivative transactions will cause firms that are not clearing members at a derivatives clearing agency to clear their transactions indirectly through market participants that are clearing members. The rules published today aim to ensure that customers of these clearing services are well protected.

The purpose of the proposed rule is to “ensure that customer clearing is done in a manner that protects customer collateral and positions and improves derivatives clearing agencies’ resilience to a clearing member default,” the CSA says in its notice.

To that end, the rule contains requirements for the treatment of customer collateral, including requirements relating to the segregation and use of customer collateral. “These requirements are intended to ensure that customer collateral is protected particularly in the case of financial difficulties of a clearing member or clearing intermediary,” it says.

The rule also includes detailed record-keeping, reporting and disclosure requirements “intended to ensure that each customer’s collateral and positions are readily identifiable”. And, it contains requirements relating to the transfer of customer collateral and positions “intended to ensure that, in the event of a clearing member default or insolvency, customer collateral and positions can be transferred to one or more non-defaulting clearing members without having to liquidate and re-establish the positions.”

The regulators note that the proposals published today should be considered in conjunction with recently proposed rules from various members of the CSA that deal with requirements for clearing agencies, as these initiatives all deal with central counterparty clearing.

“The model rule would implement a robust protection regime for customers in cleared OTC derivative transactions,” said Bill Rice, chair of the CSA and chair and CEO of the Alberta Securities Commission (ASC). “It imposes requirements on clearing agencies and their participants that will protect derivatives market participants in times of financial stress and will facilitate the transfer of customer positions and collateral.”

The comment period is open until March 19.