Canadian Derivatives Clearing
Corporation
Changes to the OTC Marketplace
Glenn Goucher
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Introduction
¾
Derivatives role in crises
¾
Global regulatory response
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‰
2
American
European
¾
Canadian situation
¾
CDCC initiatives
¾
Summary
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Derivatives Role in Crisis
¾ Not cause but contributor
¾ Discussion focused around OTC
‰
CDS, CDO
¾ Everything else (CMBs, swaps etc...)
¾ Regulatory focus
Systemic risk
‰ Counterparty credit risk
‰ Transparency (pricing and positions)
‰ Liquidity
‰
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Regulatory Response
¾ Rapidly evolving and, significantly, well coordinated
¾ G20 commitments
‰
Central Banks: Coordinated liquidity and policy
‰
Regulators: IOSCO
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Policy Makers: Finance departments
¾ Most visible: U.S. and European
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U.S. Status
¾ Obama plan to Congress August 11
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Position reiterated September 15
¾ Comprehensive and overarching
‰
‰
Mandate exchange traded and centrally cleared for OTC
‘standardizable’ contracts
Reporting, record keeping and registration by product or customer
¾ G15 (global banks) make commitments to clearing
majority of CDS and swaps by end of year (letter to
Dudley-footnote)
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European Status
¾ Commission meeting September 25 in Brussels
Policy paper published by October
‰
Central clearing strategy
¾ OTC clearing organizations, July 1 CDS
¾ Standardizable – US vs Euro
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‰
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Cleared by any regulated clearinghouse
Degree to which straight through processing occurs- from trade,
clear and settle
Canadian Situation
¾
Little visibility into regulatory thought process
‰
Regulators represented through CSA at G20
¾ Policy Makers (Finance – watching developments)
¾ BoC visibly engaged
‰
Governor Carney Beijing speech August 12th
• Continuously open funding markets
• Sustainable securitization
• New bank capital requirements
• Macroprudential approach to regulation
• A system that can withstand failure
¾ IIAC and Repo
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CDCC Background
Role of the CDCC:
Issuer, clearinghouse and guarantor of exchange-traded derivatives in Canada
Brief History:
‰ Founded in 1975 as Trans Canada Options
‰ Name changed to CDCC in 1996 to reflect its increased product coverage
‰ Changed to for-profit status in 1999 after market re-organization and became a wholly-
owned subsidiary of MX
‰ AA rating established by Standard & Poor’s in 2002
Current Business:
‰ Exchange traded derivatives
‰ OTC clearing through its Converge® service offering
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Risk Management at CDCC
Risk Management Process
Default Management
Process
Regulatory Infrastructure
and status under PCSA
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–
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Clearing Member (Counterparty) selection
Standardized Margining (credit risk
mitigant)
Risk Mutualization (systemic risk mitigant)
–
–
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Liquidation / transfer of positions
Member drawdown
CDCC resources
–
Providing certainty in default scenarios
CDCC Infrastructure
¾ Regulatory changes
¾ Technology changes
¾ Customer focus
¾ DCO status
¾ Expanded membership
¾ TMX commitment
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CDCC Planned Initiatives
¾ Repo solution
‰
Meets accounting requirements and provides for balance sheet
netting
‰
Increased volumes in the absence of structural constraints (GoC,
Provies, Mortgage bonds)
‰
Plug and play for existing members
¾ FX options and forwards
¾ Options on fixed income securities
¾ Options on equity baskets
¾ Swaps
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Benefits of Centralized Clearing
•
Direct operational benefits:
–
–
–
–
–
–
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Improved return on
capital driven by:
•
ISDA documentation unnecessary
Multilateral netting
Centralized business processes
Efficient use of capital and collateral
Freeing up lines of credit
Risk mutualization
Scalability
Benefits to participating firms:
– Reduced credit and operational risks
(reduced credit risk capital charges)
– Decreased operational costs
– Increased transactional volumes
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Summary
¾ OTC market evolution part of larger reform effort of
financial system
¾ Swinging pendulum – return to risk
¾ Canadian solution to reflect a Canadian market
situation
¾ No market or regulatory arbitrage
¾ Sunlight is the disinfectant; regulation is the
immunization
¾ The lessons of history – learn or repeat
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