The global financial crisis brought the over‐the‐counter (“OTC”) derivatives market into the limelight, and highlighted the considerable risks that OTC derivatives can pose to the financial system. For the past year, the CSA Derivatives Committee (“Committee”) has been closely following international regulatory proposals and legislative developments, consulting with Canada’s OTC derivatives market participants and collaborating with other Canadian regulators to determine the most appropriate approach to enhancing the regulatory framework for our markets. 
In each of the subject areas addressed in the paper, the Committee notes that clear jurisdictional authority in each province, as well as specific rule‐making powers, need to be set out in provincial securities and derivatives legislation. Furthermore, in order to implement many of the recommendations in this paper, the CSA will need to develop information sharing and co‐operation agreements with international regulators, as well as foreign trade repositories and central counterparty clearing houses (“CCPs”). 
The Committee is seeking input from the financial industry and the public in relation to the Committee’s proposals regarding the regulation of OTC derivatives. The following is a summary of the Committee’s key recommendations for consideration: 
Clearing: The Committee recommends the mandatory central clearing of OTC derivatives that are determined to be appropriate for clearing and capable of being cleared. Further input and study is required regarding the location and type of CCP to be used, including an assessment of the necessity of a Canadian solution versus the use of international CCPs. 
Trade Repositories: The Committee recommends that Canadian provincial securities laws be amended to mandate the reporting of all derivatives trades by Canadian counterparties to a trade repository. 
Electronic Trading: In the near term, the Committee recommends that provincial regulators obtain regulatory authority to mandate electronic trading of OTC derivative products. However, such power should, in time, only be used to mandate the electronic trading of those products which are capable of being traded on an organized trading platform (e.g. products which are sufficiently standardized and liquid) and which pose a systemic risk to the market. 
Capital and Collateral: The Committee recommends using a risk‐based approach by imposing capital and collateral requirements to reflect appropriately the risks that an entity assumes. Specifically, the Committee recommends implementing higher capital and collateral requirements for non‐centrally cleared bilateral arrangements as compared to transactions involving a CCP, subject to certain exceptions. 
End‐User Exemptions: The Committee recommends establishing exemptions from the regulatory proposals outlined in this paper for defined categories of end‐users. This approach necessitates further study to define categories of end‐users which should be permitted to use exemptions, conditions end‐users will need to satisfy to rely on the exemptions and whether there should be a threshold test as part of the end‐user exemptions. 
In addition to the above mentioned recommendations, the Committee also addresses the following issues: 
 Enforcement, market abuse, surveillance –The Committee recommends that provincial regulators obtain authority to conduct surveillance on OTC derivatives markets, develop robust market conduct standards applicable to OTC derivatives trading and obtain authority to investigate and enforce against abusive practices in the OTC derivatives marketplace. 

 Segregation of Capital – The Committee recognizes that further analysis is required before making a recommendation regarding the segregation of capital in the Canadian OTC derivatives context. 

The Committee invites participants to provide input on the issues outlined in this public consultation paper. You may provide written comments in hard copy or electronic form. The comment period expires on January 14, 2011.

Consultation paper