Dodd-Frank 30 Day Countdown: Day 22

Canadian Entities Aim for OTC Derivatives Regulation

Though Canada represented only $9 trillion of the $600 trillion OTC derivatives market last year, Canadian investors were not exempt from the fury of the recent market meltdown. In 2007, Canadian investors involved in the asset-backed commercial paper market suffered losses of $35 billion. But, losses notwithstanding, our northerly neighbors have only recently begun to discuss their intentions with respect to regulating the OTC derivatives market.

Yesterday, Canada’s securities commissions issued a proposal to require that OTC derivative transactions be reported through trade repositories that meet international standards.  Kevin Fine, the director of the derivatives branch at the Ontario Securities Commission (OSC), said trade repositories were the first target of the securities regulators because they will do the most to expose market risk and irregularities.

The OSC proposal requires that trade repositories operating in Canada meet internationally accepted governance and operational standards relating to market transparency, operational reliability, confidentiality of data and record-keeping.  The proposal also recommends that Canada’s provincial securities laws be amended, if and where necessary, to permit and require the reporting of OTC transactions entered into by a Canadian counterparty to an approved trade repository.

Canada is weighing its options before acting, despite U.S. criticism to move forward quickly with reforms as the Dodd-Frank deadline approaches.  Tiff Macklem, Senior Deputy Governor of the Bank of Canada, describes the Canadian debate as a choice between two regulatory paths.

One option is to join global clearing and reporting efforts if the Canadian Securities Administrators can ensure that efficient access is available to local market participants and oversight is shared among all regulators.  Although coordination has proven difficult among the different regulatory jurisdictions, this option would calm some concerns over arbitrage opportunities between neighbors. Kevin Fine, the director of the derivatives branch at the Ontario Securities Commission (OSC), has also expressed that there are “strong arguments” for creating a trade repository within Canada, a possibility that is being explored by the OSC working with other regulators including the Office of the Superintendent of Financial Institutions and the Bank of Canada.  This second, “local” option would give the Canadian regulators the best access for oversight, allowing the creation of policies and structures that respond to domestic concerns.

Arguments for and against each of these paths are being carefully considered in Canada.  Some see the lack of decision as contributing to global uncertainty on OTC derivatives, but at least some Canadian policymakers see it as leading to a wiser, better-developed Canadian decision.

-Shari Geller co-authored this post