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February 27, 2018

OSFI published guideline outlining the factors that it expects administrators of federally regulated private pension plans to consider when developing policies and procedures for the sound risk management of derivative activities. This guideline replaces the 1997 guideline on the best practices for derivative activities. The new guideline incorporates several revisions resulting from comments received during the public consultation process, which began in July 2017. OSFI also published a summary of the comments received from stakeholders and how they have been addressed.

The new guideline covers both exchange-traded and over-the-counter (OTC) derivatives. It builds on the 1997 version by reflecting current practices with respect to the risk management of derivatives activities. While derivatives can be effective tools for risk mitigation, the associated risks must be identified, measured, monitored, and controlled as part of the comprehensive risk management framework of a pension plan. The guideline also sets expectations for plan administrators that invest in derivatives indirectly through various types of funds, including pooled funds and hedge funds.

OSFI expects plan administrators to consider how this guideline applies to their pension plan, keeping in mind their investment objectives, risk tolerance, and other relevant factors. Prudence may require some plans to have more rigorous practices and procedures than others. Prudence may also lead an administrator to a determination that derivative transactions, or certain types of derivatives, are inappropriate for a particular pension plan. It is the responsibility of the plan administrator to make these determinations.

 

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Keywords: Americas, Canada, Insurance, OTC Derivatives, Exchange Traded Derivatives, Guideline, Pension Plans, OSFI

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