Proposed National Instrument 94-102 Derivatives: Customer Clearing and Protection of Customer Collateral and Positions and the related companion policy (together, the "Customer Clearing Instrument") were published by the Canadian Securities Administrators (the " CSA") on January 21, 2016. The Customer Clearing Instrument is based on the Model Rule published as CSA Notice 91-304 over two years ago on January 16, 2014. In publishing the Customer Clearing Instrument, the CSA asked that it be considered together with National Instrument 24-102 Clearing Agency Requirements and the upcoming publication of proposed National Instrument 94-101 Mandatory Central Counterparty Clearing of Derivatives. The comment period for the Customer Clearing Instrument ends on April 19, 2016. The Customer Clearing Instrument addresses the comments received by the CSA on the earlier Model Rule.

The purpose of the Customer Clearing Instrument is to ensure that customer clearing is done in a manner that protects customer collateral and positions and improves derivatives clearing agencies' resilience to a clearing member default. The Customer Clearing Instrument does not provide a detailed explanation of customer clearing; however, readers can refer to CSA Consultation Paper 91-404 Derivatives: Segregation and Portability in OTC Derivatives Clearing for additional information.

The Customer Clearing Instrument contains requirements for the treatment of customer collateral by clearing intermediaries, including clearing members, and derivatives clearing agencies, including requirements relating to the segregation and use of customer collateral. These requirements are intended to ensure that customer collateral is protected, particularly in the case of financial difficulties of a clearing intermediary. The Customer Clearing Instrument includes detailed record-keeping, reporting and disclosure requirements intended to ensure that customer collateral and positions can be readily identified. The Customer Clearing Instrument requires customer positions to be fully collateralized at the regulated clearing agency and obligates the regulated clearing agency and clearing intermediaries to keep records that identify customers and their positions. It also contains requirements relating to the transfer or porting of customer collateral and positions intended to ensure that, in the event of a clearing intermediary default or insolvency, customer collateral and positions can be transferred to one or more non-defaulting clearing intermediaries without having to liquidate and re-establish the positions.

The Customer Clearing Instrument recognizes that a variety of customer clearing models and supporting legal frameworks exist in the United States, Europe and elsewhere and permits a wide range of clearing agencies to offer their customer clearing models in Canada. The CSA's approval and oversight process for recognized or exempt clearing agencies will include a careful review of the customer safeguards provided by each clearing agency that offers customer clearing in Canada.

Unlike the earlier Model Rule that proposed a broad application, the Customer Clearing Instrument applies to a clearing intermediary or foreign clearing agency only where it is involved in a transaction with a local customer. The Customer Clearing Instrument also recognizes that multiple clearing intermediaries may be involved in a transaction and provides that each clearing intermediary in the customer clearing chain, including both executing and clearing dealers, is subject to its full requirements. The CSA also acknowledge that derivative clearing infrastructure and service providers are primarily located outside of Canada and propose substituted compliance in certain circumstances where a foreign entity is involved in a transaction and appropriate foreign laws apply.

The Customer Clearing Instrument applies to transactions that are cleared on behalf of a customer if they fall within the scope of the various provincial product determination rules that are in effect. The CSA has yet to confirm which derivative instruments are required to be cleared and, therefore, it is difficult to clearly identify the business impact to derivative participants generally, and in particular, on executing and clearing intermediaries.

The Customer Clearing Instrument does not address the treatment of customer collateral under bankruptcy legislation in Canada, although it does recognize the impact that such legislation may have on the proposed collateral arrangements. The CSA addresses this issue through disclosure requirements on both the regulated clearing agencies and the clearing intermediaries. As we have suggested in the past, in order to fully protect customer collateral, changes need to be made to existing Canadian bankruptcy legislation.

Similarly, the CSA will need to amend the derivative provisions found in National Instrument 81-102 — Investment Funds ("NI 81-102") to conform to the requirements in the Customer Clearing Instrument. If these conforming changes are not made, investment funds subject to NI 81-102 will not be able to enter into cleared trades in accordance with the Customer Clearing Instrument without exemptive relief.

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If you have any questions on the Customer Clearing Instrument, please contact the authors of this alert or any other member of the BLG Derivatives Group. BLG is ranked as the Number One Law firm in Canada for Derivatives by Derivatives Weekly and was named Canada Law Firm of the Year at Global Capital's 2014 and 2015 Americas Derivatives Awards. BLG's Derivatives Group is a multi-disciplinary team of lawyers that cuts across several of our practice groups. The lawyers in BLG's Derivatives Group are experienced in negotiating derivatives documentation with sell-side and buy-side market participants around the world. Our clients include financial institutions, investment dealers, futures commission merchants, market intermediaries, securitization conduits and a wide variety of derivative end-users, such as mutual funds, hedge funds, pension funds, other investment vehicles, commodity producers, real estate firms, insurance companies, risk management firms and other corporate end-users. Our advice covers derivative structuring and document negotiation, regulatory compliance, tri-party collateral control practices and close-out issues. We also advise on compliance and registration requirements relating to derivatives in Canada.


Carol E. Derk

Julie Mansi


Investment Management