Expanding Access to Canadian Derivatives Clearing

Agenda

• A Global Access to CDCC CDCC with Canadian Clearing Members (CM), and Global

Customers CDCC with Canadian and non-Canadian CMs, and Global

Customers CDCC with Canadian and non-Canadian CMs, linked to

non-Canadian CCP

• CDCC for Buy-side Participants Client Clearing Model How to clear an OTC trade? Benefits to Clients Client Protection

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A Global Access to CDCC

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• Based on its established strengths in three key areas, Risk management, Legal and regulatory framework and, Technology and clearing infrastructure,

• CDCC is committed to expanding its clearing services to ensure that the Canadian market is linked to the global marketplace,

With flexibility to develop international partnerships that best serve the domestic market,

While enabling product evolution and inclusive membership flexibility.

• A phased approach providing for foreign direct clearing access as a prelude to linkage is implemented.

A Global Access to CDCC (cont’d)

CDCC with Canadian Clearing Members (CM), and Global Customers

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• In the current environment, Canadian clearing participants interact with each other and with foreign participants either directly with affiliates that are clearing members of CDCC or as foreign customers.

A Global Access to CDCC (cont’d)

CDCC with Canadian and non-Canadian CMs, and Global Customers

• In a first phase, CDCC will initiate jurisdictional recognition of its status in the U.S. and European markets to facilitate direct clearing by foreign members of Canadian derivatives.

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A Global Access to CDCC (cont’d)

CDCC with Canadian and non-Canadian CMs, linked to non-Canadian CCP

• In a subsequent phase, CDCC will established links through interoperability arrangements with global CCPs providing either clients or product coverage for the Canadian marketplace.

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CDCC for Buy-side Participants

• In addition to expanding the member clearing base to include global trading partners of the Canadian market, CDCC is also committed to increasing buy-side market participation.

• To this end, CDCC is developing:

Direct buy-side clearing opportunities Particularly as part of the fixed income clearing service initiative

Indirect buy-side clearing with robust segregation and portability arrangementsClient clearing currently permissible in the exchange-traded marketplace and, for the OTC activities offered by CDCC

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CDCC for Buy-side ParticipantsClient Clearing Model

• CDCC operates a traditional FCM model for buy-side participation.

• Buy-side firms with no capacity for direct clearing can benefit of a CCP model by passing through a clearing member.

• Clients contract clearing arrangements with clearing members and clearing members contract with CDCC.

• A cleared trade results in the following legs:

CDCC vs. Clearing Member CDCC vs. Executing Broker Client vs. Clearing Member

• Margin is held at CDCC in a Client Account segregated from Firm.

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CLIENT

EXECUTING BROKER

FIRM ACCOUNT

CLIENT ACCOUNT

BILATERAL TRADE

CLEARED TRADE

CLEARING MEMBER

FIRM ACCOUNT

CLIENT ACCOUNT

Margin

CDCC for Buy-side Participants (cont’d)

How to clear an OTC trade?

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AFFIRMATION EXECUTION CLEARING

Client executes trade with Executing Broker

Executing Broker alleges trade to Client

Client appoints Clearing Member and affirms trade

Matched trade is sent to CDCC by the affirmation system

After applying acceptance tests, CDCC validates the trade

A notification for successful registration is sent to the affirmation platform

A clearing confirmation is sent to the Clearing Member Trading practices

remain unchanged Multiple trading

platforms supported

Connectivity with trade affirmation/matching platforms

Intra-day confirmation of registered trades

CDCC for Buy-side Participants (cont’d)

Benefits to Clients

• Mitigation of credit risk By reducing bilateral counterparty exposure

• Protection in case of a clearing member default Clearing service for clients must provide a robust protection

in the event of a clearing member default. This protection comes in the form of:

- Segregation of client margin from firm- Portability of assets and positions

• Operational efficiency Trading anonymity Existing relationships with executing dealers maintained Improved price discovery mechanism and execution

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CDCC for Buy-side Participants (cont’d)

Client Protection

• Segregation and portability arrangements are currently under policymakers and regulators’ scope

• Key issues to be addressed to offer customer level protection: Segregation

- The manner in which assets are provided to cover margin requirements (Security Interest/Trust Arrangements vs. Title Transfer Arrangements)- Gross vs. net margin requirements and the segregation and accessibility of the difference- Where are margin assets maintained for clients: at the clearing member, at the CCP or at a third party custodian- Commingling of assets for those maintained at the clearing member level- Liens or setoff provisions on margin assets by clearing members

Portability- Margin assets held away from clearing members- No margin asset commingling- Margin assets free from liens and setoff rights

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