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Canada’s phase 5 mitigation map

Canada’s Office of the Superintendent of Financial Institutions (OSFI) is the first Regulator to break cover following BCBS\IOSCO’s 5 March statement. On 28 June the OSFI published a letter on its website, purporting to give guidance on the statement. For the convenience of its readers, the letter restates the BCBS\IOSCO statement, then goes on to shed very little light:

“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 noted in Guideline E-22”

Readers will recall CFTC Chair Giancarlo’s “recommendation” that US regulators clarify that IM arrangements do not need to be in place until the USD 50m threshold is breached. Although, lacking any detail as to any timescale to compliance following a breach, the CFTC recommendation does confer a degree of certainty as to when IM arrangements have to be put in place. The OSFI faithfully transcribes the imprecision of the BCBC\IOSCO statement, “approaches” is a term that is determinedly resistant to definition. An entity that trades only very rarely in typically tranquil markets may be far from approaching the threshold at CAD 70m; differently constituted, a counterparty may be approaching the  threshold at CAD 60m.

Intentioned or otherwise, the effect is to deliver mystification rather than meaningful Phase 5 mitigation.

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