OSFI Releases Draft Guideline B-7 Derivatives Sound Practices

Category: Credit Matters
Published: Thursday, 16 October 2014
Written by Admin

On October 1, the Office of the Superintendent of Financial Institutions altered the trajectory of over-the-counter (OTC) derivatives reform in Canada. With the release of its much-anticipated and now-renamed Guideline B-7 Derivatives Sound Practices, OSFI has veered away from proposals issued in stages by the Canadian Securities Administrators (CSA) over the past four years, but has added an essential piece to the up to now incomplete provincial response to the G-20 leaders who in 2010 committed to reform OTC derivatives markets.

Although short of asserting complete federal jurisdiction over derivatives as a matter of international trade and commerce and control of systemic risk in the economy, the Guideline is the clearest indication to date that the federal government has staked out a dominant role for itself in this area.


The Guideline applies to all federally-regulated financial institutions (FRFIs) and their consolidated subsidiaries. Clearly OSFI does not intend to play a secondary role in overseeing FRFIs’ derivatives-related activities. As noted in the introductory letter to the Guideline “[t]he Canadian derivatives market is dominated by FRFIs including the five largest banks for which derivatives activities represent a core business overseen by OSFI as part of its prudential mandate.” By including securities dealers and other bank subsidiaries under federal derivatives regulation OSFI has left only commercial end-users under provincial jurisdiction, rendering the provincial rules essentially redundant since activities of end-users’ counterparties will fall under the federal rules, 99 times out of 100.


Guideline B-7 differs markedly from the CSA proposals on OTC derivatives reform, being geared towards the actual risks (market, credit, liquidity and operational) assumed by market participants, and including proposals to measure, monitor and reduce those risks. The Guideline acknowledges and reflects the international and global nature of derivatives activities, and guides FRFIs and their subsidiaries participating in and contributing to international reform efforts. By both including and omitting, OSFI lays out what is important and what is not from a Canadian regulatory and risk management perspective. In contrast, CSA reform proposals simply imported, on a province-by-province basis, virtually all OTC derivatives reforms in the US Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) and its European Union counterpart, EU Regulation No.648/2012 (EMIR), and regulated those matters at the provincial and territorial level in the same way they are regulated internationally by the US and European regulators. It is apparent that OSFI has consulted with (and listened to) its regulatory constituency, and has striven to develop a set of principles-based guidelines that recognize the sufficiency and paramountcy of international rules as a code of conduct for Canadian financial institutions.

Application of Provincial Reforms

It is far from clear how the provincial OTC derivatives regime will apply to FRFIs and their subsidiaries in light of the OSFI Guideline. In the most recent omnibus budget implementation bill, the federal government gave itself the explicit power to regulate derivatives activities of banks under the Bank Act, but it has not yet done so. The explanatory letter accompanying the Guideline states “In the Guideline, reference may be made to rules promulgated by other regulators, including provincial securities regulators, which will be considered to be applicable to FRFIs by virtue of this Guideline. OSFI will monitor FRFIs compliance with these requirements, and will continue to review the appropriateness of their application to FRFIs.” Read: for now certain provincial rules will overlay the OSFI Guideline, but the federal government reserves the right to withdraw FRFIs and their subsidiaries from the provincial rules.  In any case, OSFI will monitor FRFIs’ compliance with provincial rules incorporated by reference into the federal regime. A small but significant note in the Guideline says that the province where an FRFI has its principal place of business will be the province whose rules apply to the derivatives activities of that FRFI. In contrast, the provincial rules now assume jurisdiction if an institution meets any one of three criteria: having its principal place of business, or its head office, in the province, or being incorporated under the laws of that province, a scenario that could see three jurisdictions claiming primary regulator status. The OSFI Guideline provides a reprieve for FRFIs and their subsidiaries from this bit of inter-provincial regulatory turf squabble, one that was needed because three of the five largest banks would have potentially been caught in a jurisdictional tug-of-war.

What to watch?

Areas to anticipate ongoing federal attention include:

  • Electronic Trading: A push toward standardizing OTC derivatives and moving trading to organized platforms. (The CSA had promised to publish a consultation paper on this subject in the summer of 2014, but has not yet done so.)
  • Reportable Data to Trade Repositories: OSFI adopts the provincial regimes by reference but publishes a much shorter list of data it considers important compared to what is currently included in the provincial rules (which in their original form went beyond what was required under the Dodd-Frank Act and EMIR, but have since been amended to harmonize with the international requirements).
  • Exchange-Traded Derivatives: The Guideline, like the Dodd-Frank Act and EMIR, applies to exchange-traded derivatives activities in many respects, and not just OTC derivatives. The CSA proposed reforms only apply to OTC derivatives.
  • Margining: Margin and capital requirements for counterparties figure prominently in the Guideline, whereas the CSA has not yet set out its position for margining or indicated a date when the CSA proposal on margin and capital would be issued.
  • Market Conduct: Here OSFI and provincial proposals are possibly headed for collision, with the Guideline taking a very principles-based approach and the provincial proposals being very prescriptive.

On the surface, the Canadian framework for OTC derivatives reform appears as fragmented as ever. But perhaps, given the scope of the territory staked out by OSFI in its new Guideline, and the looming threat of actual federal regulations, the system will become less fragmented, and more harmonized. The reality is that  most, if not all, of the derivatives activity in the system will be governed by revised Guideline B-7, eventual federal regulations, and/or international rules. Stay tuned.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

USDA workshop addresses housing

Category: Credit Matters
Published: Wednesday, 15 October 2014
Written by Admin

By Steve Hansen

QCS Managing Editor

A housing workshop sponsored by US Department of Agriculture Rural Development Housing Task Force drew 77 area residents to the Tucumcari Convention Center Tuesday to learn about assistance with major home repairs, energy efficiency, and credit matters related to home buying.

Ernie Watson, a rural development specialist, said Tucumcari's turnout was the best of any workshop that USDA Rural Development has seen at any of its sessions statewide.

Terry Brunner, director of USDA Rural Development for the state, introduced the session with some alarming statistics about housing in Quay County and northeastern New Mexico that show the  effects of a lack of home development in the area.

For instance, in Quay County, he said, 34 percent of its housing units are vacant, more than twice the state's rate of 15 percent.  About 38 percent of the county's housing units are valued at less than $50,000, three times higher than the state's rate of 13 percent of housing units valued at less than $50,000.   The median value of homes in Quay County, he said, is $68,800, almost $100,000 less than the state's median value of $161,800.

Other northeast New Mexico counties show even less favorable numbers.  Colfax County, for example has a vacancy rate of 42 percent.  Mora County has a 46 percent vacancy rate. Only Harding County, however, had a higher percentage of housing units priced below $50,000 at nearly 43 percent.  Brunner said the US Census Bureau was his source for these statistics.

Brunner said these numbers reflect the aging of the population in these counties, as well as declining economies.  In Quay County, he said, the percentage of households with children under 18 years old is 18.6 percent, compared with 29.3 percent for the rest of the state, and 30 percent nationally.

The first steps in dealing with what he called northeast New Mexico's "housing desert," he said, are to help the people who live in the area with some basic steps in home buying and home improvement.  Tuesday's housing workshop was designed to help area residents get started with information about what is available and how to qualify for assistance from the USDA and other agencies.

The bulk of Tuesday's workshop occurred through  "breakout sessions" that focused on the areas of home rehabilitation, how to qualify for a federal USDA or a state Mortgage Finance Authority loan to buy a home, how to become credit-worthy and remain that way, and home energy efficiency.

The most popular sessions dealt with home rehabilitation, where Diana Lopez, a rural development specialist, guided up to 30 residents through what kind of improvements and repairs are eligible for USDA grants and loans , and how residents can qualify for assistance. Assistance is also available, she said, to make mobile home foundations permanent, which then qualifies them for grants and loans to make other improvements.

The energy efficiency session also drew good attendance.  Ken Hughes, a clean energy specialist for the New Mexico Energy, Minerals and Natural Resources  Department, talked about lighting, refrigerators, home insulation and other areas in which residents can help their homes achieve comfort levels at less energy cost.  In addition, Hughes talked about the savings available by installing solar energy in homes with monthly electric bills in excess of $100 per month.

Chris Herbert, Eastern Regional Housing Authority director, and Sandy Chancey, director of the Eastern Plains Council of Governments, teamed up to offer advice on becoming credit-worthy.

First, Herbert said, some credit should be established, either through loans or qualifying for a credit card.  It is also important, he said, to limit the use of a credit card.  The balance due on the card, he said, should never be more than 15 percent of the credit limit, and payments should be made on time.  If  the credit limit on the card is $10,000, he said, the balance due should never exceed $1,500.  It is also important to keep credit cards.  The best credit scores, he said, result from credit cards held for at least 10 years, especially if on-time payment is consistent.

For some major purchases that become necessary, Herbert said, it is sometimes advisable to attempt to finance the expense with an installment loan through a bank, rather than with a credit card.

Credit-worthiness is reflected in credit scores, he said, and the better the credit score, the more likely it is that a potential home buyer can secure a mortgage and the better the rate will be.

Teri Baca, a specialist with the New Mexico Mortgage Finance Authority, guided participants through the steps of qualifying for USDA and MFA loans for first-time home purchases.  Some loan programs, she said, will even offer down payments as a grant.

Brunner said he hopes that workshops such as Tuesday's session will lead to more home-buying and better home maintenance, which, he said, could be a first step in  attracting more home builders to the northeast region, where housing stock is aging and new construction is sparse.

Tucumcari hosted the workshop after Brunner consulted with Pat Vanderpool, executive director of the Greater Tucumcari Economic Development Corporation, and Vanderpool made  arrangements with the Convention Center to host the event, Vanderpool said.