OTTAWA, March 26, 2013 /CNW/ - The Governor of the Bank of Canada has
designated SwapClear as subject to ongoing regulatory oversight by the
Bank under the Payment Clearing and Settlement Act (PCSA), effective 2
SwapClear, established in 1999, is the dominant global system for
centrally clearing over-the-counter (OTC) interest rate swaps (IRS). It
is operated by LCH.Clearnet Limited (LCH), a U.K.-based company that
operates a number of central counterparty (CCP) services.
Clearing activity of Canadian institutions in SwapClear has increased
substantially, in line with Canada's G-20 commitment to centrally clear
all standardized OTC derivatives. There is potential for further
growth, given the decision by Canadian authorities in October 2012 that
any CCP that clears OTC derivatives and is recognized by Canadian
authorities, including global CCPs, can be used by Canadian market
participants, provided that the CCP complies with the Principles for
Financial Market Infrastructures (the Principles) published by
CPSS-IOSCO1 and that the four safeguards identified by the Financial Stability
Board are met.2
The Bank of Canada has determined that SwapClear, an eligible system
under the PCSA,3 has the potential to pose systemic risk to the Canadian financial
system because of:
the central role that the IRS market plays in the Canadian financial
SwapClear's dominance in clearing the IRS market
the significant counterparty exposures of Canadian banks that are
concentrated on SwapClear
The Minister of Finance has confirmed that he is of the opinion that
designation is in the public interest.
"The designation of SwapClear represents a significant milestone towards
achieving a safer and more resilient financial system for Canadian
participants," said Governor Mark Carney. "Our involvement in the
oversight of SwapClear, to ensure strong risk management prevails, will
enable Canada to reap the benefits of the central clearing of OTC
interest rate derivatives, as envisioned by the G20."
Designation brings the system under the formal oversight of the Bank of
Canada, which requires all designated systems to comply with the
Principles, and provides the Bank with powers to support the system's ongoing
progress toward meeting the four safeguards. Designation also provides
the system's clearing and settlement rules with legal protections under
Canadian law, including with respect to netting, finality of payment
and finality of settlement. Upon the effective date of designation, the
Bank of Canada will fulfill its oversight responsibilities through
participation in a multilateral arrangement for oversight co-operation
led by SwapClear's lead regulator, the Bank of England, and through
bilateral interaction with the Bank of England and LCH.
Under the PCSA, the Bank of Canada has formal responsibility for the
oversight of designated clearing and settlement systems,4 for the purpose of controlling systemic risk. In this context, systemic
risk is defined as the risk that the default of one participant in a
clearing and settlement system, or a serious problem arising within the
system itself, could lead, through the activities of the system, to the
default of other institutions or systems.
Four systems have been previously designated by the Bank: the Large
Value Transfer System (LVTS), which clears and settles large-value
Canadian-dollar payments; CDSX, which clears and settles securities
transactions; CLS Bank, a global system for the settlement of foreign
exchange transactions; and the Canadian Derivatives Clearing Service,
which centrally clears fixed-income and derivatives contracts.
For further information on the Bank of Canada's responsibilities for the
oversight of clearing and settlement systems in Canada, please visit
the Bank's website.
1 Committee on Payment and Settlement Systems (CPSS) and the
International Organization of Securities Commissions (IOSCO)
2 The four safeguards are: (i) fair and open access by market
participants to CCPs; (ii) co-operative oversight arrangements for CCPs
between relevant authorities; (iii) resolution and recovery regimes
that aim to ensure that the core functions of CCPs are maintained
during times of crisis; and (iv) appropriate emergency liquidity
arrangements for CCPs in currencies in which they clear.
3 SwapClear meets the current PCSA requirements for an eligible system.
It has at least three participants (at least one of which is a Canadian
participant and at least one of which has its head office in a
jurisdiction other than the head office jurisdiction of the system
operator, LCH), and it clears and settles partially in Canadian
4 A clearing and settlement system under the PCSA includes a system or
arrangement for the clearing or settlement of derivatives contracts,
provided that the system or arrangement meets the requirements listed
in footnote 3 above.
SOURCE: Bank of Canada
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