June 28, 2019

OSFI updated the Guideline E-22, which establishes minimum standards for margin requirements for non-centrally cleared derivative transactions undertaken by the federally regulated financial institutions. The updates relate to the amendments to legacy derivative contracts for addressing the interest rate benchmark reforms and to the documentation, custodial, and operational arrangements related to the exchange of initial margin between covered entities. The initial margin requirements will be phased-in to smaller counterparties by September 2020.

The guideline, which is based on the BCBS-IOSCO framework, was initially finalized in February 2016 and became effective in June 2017. Under the guideline, most covered federally regulated financial institutions that meet the definition of a covered entity have been subject to the mandatory exchange of variation margin from March 01, 2017. The guideline also requires the covered financial institutions to exchange initial margin. The exchange of initial margin began in September 2016 for the largest derivatives counterparties and is being gradually phased-in to smaller counterparties until September 2020. The updates to the guideline relate to the following:

  • Amendments to legacy derivative contracts, pursued solely for addressing interest rate benchmark reforms, are deemed genuine amendments under footnote 17 of Guideline E-22. As such, these amendments would not require the application of the margin requirements for legacy derivative contracts under Guideline E-22.
  • Documentation, custodial, and operational arrangements related to the exchange of initial margin between covered entities are not required to be entered into until the amount of initial margin to be exchanged approaches the CAD 75 million threshold, which is noted in Guideline E-22.

The updates are in support of the BCBS and IOSCO statement that was issued in March 2019. BCBS and IOSCO said that the amendments to legacy derivative contracts pursued solely for the purpose of addressing interest rate benchmark reforms do not require the application of the margin requirements for the purposes of the BCBS-IOSCO framework, although the position may be different under relevant implementing laws. BCBS and IOSCO also noted that the framework does not specify documentation, custodial, or operational requirements if the bilateral initial margin amount does not exceed the framework's EUR 50 million initial margin threshold. The guideline is applicable to banks, foreign bank branches, bank holding companies, trust and loan companies, life insurance companies, property and casualty insurance companies, and insurance holding companies.

 

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Keywords: Americas, Canada, Banking, Securities, Insurance, Margin Requirements, Guideline E-22, Non-Centrally Cleared Derivatives, OTC Derivatives, Interest Rate Benchmarks, Initial Margin, OSFI

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