Canadian policymakers’ efforts to adopt global reforms designed to enhance the oversight and stability of derivatives markets have moved forward with federal regulators issuing revised guidance.
The Office of the Superintendent of Financial Institutions (OSFI) Friday issued the final version of its revised guideline on firms’ derivatives activities, which reflects reforms to the over-the-counter (OTC) derivatives markets agreed at the G20 level. Among other things, the updated guideline sets out OSFI’s expectations for central clearing of standardized OTC derivatives, and for reporting derivatives data to a trade repository.
In response to the economic and financial crisis, G20 leaders initiated a series of reforms to the global OTC derivatives market in an effort to improve transparency, mitigate systemic risk, and protect against market abuse. In particular, the G20 agreed that OTC derivatives should be moved onto exchanges as much as possible, that they should be centrally cleared, and that non-centrally cleared contracts should face higher capital requirements.
“The derivatives market is a truly global market that is part of the core business in the domestic and cross border operations of many [financial firms],” OSFI says. “Accordingly, it is imperative that there are comparable and equivalent regulations and rules across jurisdictions in order to provide a level playing field for all counterparties to function.”
The regulator notes that the revised guideline also reflects current risk management practices with respect to derivatives. OSFI says that it expects an institution’s risk management practices and measurement techniques will depend on the nature, size, and complexity of its derivatives activities. It also recognizes the distinction between the regulatory requirements for dealers in the derivatives market, and firms that are primarily end-users of derivatives.
OSFI says that in the year ahead it is also planning to adopt the international approach to setting margin requirements for non-centrally cleared derivatives. This may also involve future revisions to its guidance, to ensure that a consistent and comprehensive set of rules apply to the OTC derivatives activities of banks and other financial institutions.
The guideline officially took effect on Nov. 1, 2014, in order to coincide with the derivatives data reporting requirements imposed by provincial securities regulators.