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CSA Staff Notice 24-310 Status Update on Proposed Local Rules 24-503 Clearing Agency Requirements and Related Companion Policies July 17, 2014 Introduction Staff of the Canadian Securities Administrators (the CSA or we) are publishing this notice to update the public on proposed rule-making initiatives of certain CSA jurisdictions governing clearing agencies. On December 18, 2013, the Autorité des marchés financiers du Québec (AMF), Manitoba Securities Commission (MSC) and Ontario Securities Commission (OSC) each published for comment the following documents, in substantially similar form, in their respective jurisdictions: • a proposed local rule 24-503 regarding clearing agency requirements (proposed Local Rule); 1 • a related proposed local companion policy 24-503CP (proposed CP); and • a notice and request for comments on the proposed Local Rule and CP (Request Notice). In addition, concurrent to the publication of the Request Notices and proposed Local Rules and CPs, provincial securities regulatory authorities in British Columbia, Alberta, Saskatchewan, New Brunswick and Nova Scotia published Multilateral Staff Notice 24-309 (the Multilateral Notice). 2 The purpose of the Multilateral Notice was to inform the public that such authorities had also begun the development of, and intended to publish at a later date, a proposed multilateral instrument substantially similar to the proposed Local Rules. The proposed Local Rule has several purposes. It sets out certain requirements in connection with the application process for recognition as a clearing agency under securities legislation (or for an application to be exempt from the recognition requirement). Guidance on the regulatory approaches to applications for recognition or exemption is set out in the proposed CP. The proposed Local Rule also sets out on-going requirements for recognized clearing agencies that act as, or perform the services of, a central counterparty (CCP), central securities depository (CSD) or securities settlement system (SSS). These requirements are based largely on international standards applicable to financial market infrastructures (FMIs) set out in the April 2012 report Principles for financial market infrastructures (as the context requires, the PFMIs or 1 The proposed Local Rules that were published for comment are the following: AMF Regulation 24-503 Respecting Clearing House, Central Securities Depository and Settlement System Requirements; MSC Rule 24-503 Clearing Agency Requirements; and OSC Rule 24-503 Clearing Agency Requirements. 2 The Multilateral Notice can be found on certain websites of such authorities. In British Columbia, for example, see: https://www.bcsc.bc.ca/Securities_Law/Policies/Policy2/24- 309_Publication_of_Clearing_Agency_Requirements_in_Ontario__Quebec_and_Manitoba__CSA_Multilateral_Sta ff_Notice_/ 1

PFMI report) published by the Committee on Payment and Settlement Systems (CPSS) and the International Organization of Securities Commissions (IOSCO). 3 A key objective of the proposed Local Rules is to adopt, in Canada, the CPSS-IOSCO international standards governing FMIs set out in the PFMI report. Implementation of the standards is intended to enhance the safety and efficiency of FMIs, limit systemic risk, and foster financial stability. It is also intended to support the work of the CSA Derivatives Committee to develop a comprehensive regulatory framework for the trading and clearing of derivatives in Canada. Status Update (a) Development of uniform Canadian requirements In response to the Request Notices, stakeholders suggested that provincial securities regulators take a unified approach to implementing the PFMIs. The CSA had discussed the prospect of a national instrument prior to the development of the proposed Local Rules, but we determined that such an approach was not feasible at the time. The CSA have reconsidered, and agree that adoption of uniform requirements governing clearing agencies is now possible and would benefit the markets. We propose to adopt the PFMIs across the country as a national instrument (proposed National Instrument). Clearing agencies operating in Canada are national in scope, and a national instrument will therefore facilitate the implementation of uniform, consistent and transparent requirements for clearing agencies in all Canadian jurisdictions. The CSA intend to develop the proposed National Instrument by taking into consideration the comments received on the proposed Local Rules (see below “Summary of Comments on Proposed Local Rules”).We expect that the proposed National Instrument will be published for a 60 day comment period in the fall of 2014. (b) Anticipated benefits of the proposed National Instrument As with the proposed Local Rules, the purpose of the proposed National Instrument will be to enhance the regulatory framework for recognized clearing agencies operating or seeking to operate in a Canadian jurisdiction. This regulatory framework will facilitate ongoing observance by recognized clearing agencies of international minimum standards applicable to FMIs. The CSA believe that the proposed National Instrument will support resilient and cost-effective clearing agency operations. It will promote transparency and support confidence among market participants in the ability of clearing agencies to provide efficient and safe clearance and settlement services, which in turn will facilitate capital formation. Also, the proposed National Instrument will further facilitate the efforts of Canadian CCPs to meet the “qualifying CCP” (QCCP) status under the Basel III and Canadian banking guidelines. Canadian and foreign banks that have certain counterparty exposures to Canadian CCPs would be subject to higher capital requirements if these CCPs do not meet the QCCP status. 3 The PFMI report is available on the Bank for International Settlements’ website (www.bis.org) and the IOSCO website (www.iosco.org). 2

(c) Joint supplementary guidance As with the proposed CPs, the companion policy to the proposed National Instrument will include supplementary guidance jointly developed by the CSA and the Bank of Canada (Bank) for domestic clearing agencies that are regulated by CSA jurisdictions and the Bank (Joint Supplementary Guidance). Joint Supplementary Guidance related to governance standards was published for comment in the proposed CPs. The CSA and the Bank intend to publish for comment further Joint Supplementary Guidance on other standards. The CSA intend to publish for comment such further Joint Supplementary Guidance in the companion policy to the proposed National Instrument. Because of its importance to certain Canadian clearing agencies, the Bank has published the Joint Supplementary Guidance related to liquidity risk on its website for a 30-day comment period. 4 We are supportive of the Bank’s publication of this guidance. We intend to re-publish the guidance related to liquidity risk later this fall with the proposed National Instrument and related companion policy. We would encourage prospective commenters to provide their views, if any, during the Bank’s comment period, which expires on August 4, 2014 5 so that any feedback can be incorporated when we publish the proposed National Instrument and related companion policy. Summary of Comments on Proposed Local Rules The comment period for the proposed Local Rules and CPs ended on March 12, 2014 (for the MSC) and March 18, 2014 (for the AMF and OSC), respectively. Taken together, nine comment letters were received by the regulators. The list of commenters is attached as Appendix “A” to this Notice. We thank the commenters for taking the time to consider the proposed Local Rules and CPs. We have provided a summary of comments received on the proposed Local Rules and CPs in Appendix “B”. As noted above, the CSA intends to carefully consider the comments in developing the proposed National Instrument. The publication of the proposed National Instrument and related companion policy later this fall will include responses to such comments. The public will have an opportunity to review and comment on the proposed National Instrument. In general, the commenters thought that adoption of the CPSS-IOSCO standards would be a positive step for the Canadian markets and the regulation of its FMIs. There was also general agreement with the proposed Local Rules’ purpose and key objectives. Aside from a desire for a uniform approach – which will be dealt with through the development of the proposed National Instrument – some commenters requested that the PFMIs be incorporated into the rule framework in a more direct fashion than had been proposed in the proposed Local Rules, and that they be clearly separated from any additional requirements which are unique to the Canadian context. We will consider how best to redraft the proposed National Instrument to more directly 4 The Bank of Canada guidance can be found at this address: http://www.bankofcanada.ca/core-functions/financial- system/oversight-designated-clearing-settlement-systems/bank-of-canada-risk-management-standards-for-designated-fmis/. 5 See the Bank’s Notice at: http://www.bankofcanada.ca/2014/07/public-consultation-policy-guidance/ 3

incorporate the text of the PFMI principles and (where appropriate) their key considerations as rule requirements. We will also consider how best to separately identify other requirements, if any, that are in addition to the PFMIs. The remaining comments on specific matters are summarized in the attached Appendix “B”. Questions Questions with respect to this Notice, or the comments attached hereto, may be referred to: Antoinette Leung Manager, Market Regulation Ontario Securities Commission Tel: (416) 593-8901 Email: aleung@osc.gov.on.ca Maxime Paré Senior Legal Counsel, Market Regulation Ontario Securities Commission Tel: (416) 593-3650 Email: mpare@osc.gov.on.ca Oren Winer Legal Counsel, Market Regulation Ontario Securities Commission Tel: (416) 593-8250 Email: owiner@osc.gov.on.ca Michael Brady Senior Legal Counsel British Columbia Securities Commission Tel: (604) 899-6561 Email: mbrady@bcsc.bc.ca Doug MacKay Manager, Market and SRO Oversight Capital Markets Regulation British Columbia Securities Commission Tel: (604) 899 6609 Email: dmackay@bcsc.bc.ca Heather Forester Legal Counsel Alberta Securities Commission Tel: (403) 592-3055 Email: heather.forester@asc.ca 4

Paula White Manager Compliance and Oversight Manitoba Securities Commission Tel: (204)-945-5195 Email: paula.white@gov.mb.ca Claude Gatien Director, Clearing houses Autorité des marchés financiers Tel: (514) 395-0337 extension 4341 Toll free: 1 877 525-0337 Email: claude.gatien@lautorite.qc.ca Martin Picard Senior Policy Advisor, Clearing houses Autorité des marchés financiers Tel: (514) 395-0337 extension 4347 Toll free: 1 877 525-0337 Email: martin.picard@lautorite.qc.ca Liz Kutarna Deputy Director, Capital Markets, Securities Division Financial and Consumer Affairs Authority of Saskatchewan Tel: (306) 787-5871 Email: liz.kutarna@gov.sk.ca Susan Powell Deputy Director, Securities Financial and Consumer Services Commission (New Brunswick) Tel: (506) 643-7697 Email: Susan.Powell@fcnb.ca 5

APPENDIX “A” TO CSA NOTICE 24-310 Status update on proposed Local Rules 24-503 Clearing Agency Requirements and related companion policies List of Commenters Canadian Investor Protection Fund Canadian Life and Health Insurance Association Inc. CME Group Inc. IGM Financial Inc. Investment Industry Association of Canada LCH.Clearnet Group Ltd. RBC Global Asset Management Inc. TMX Group Ltd. (on behalf of all its subsidiaries) TMX Group Ltd. (on behalf of its financial market infrastructures: Canadian Derivatives Clearing Corporation, The Canadian Depository for Securities Limited, and Natural Gas Exchange) 6

APPENDIX “B” TO CSA NOTICE 24-310 Status update on proposed Local Rules 24-503 Clearing Agency Requirements and related companion policies Summary of Comments Theme/question 6 Summary of comments General Purposes of the proposed Local Rule One commenter disagrees with the drafting approach chosen to achieve the and approach to drafting purposes of the proposed Local Rule (i.e. adopting the PFMIs in a rule). The commenter feels that differences, however modest, between the PFMIs and the proposed Local Rule would require complex, time consuming and costly analyses of such differences (including what, if any, non-PFMI provisions have been added to the proposed Local Rule). The commenter enumerates several possible consequences resulting from the approach (which necessitates analyses of possible differences from the PFMIs): • it may deter participants and clearing agencies from entering/expanding in the Canadian market, leading to less competition, liquidity and stability as a whole; • clearing agencies that have begun self-assessments according to PFMI standards would have to reconsider the proposed Local Rule requirements; • domestic clearing agencies held to more rigorous provincial requirements than those based in foreign jurisdictions would be disadvantaged by an uneven playing field; • CPSS-IOSCO implementation monitoring efforts of the PFMIs would be confused by potentially different standards imposed on Canadian clearing agencies; • foreign regulators would have difficulty assessing equivalency of the proposed Local Rule to their own PFMIs-based requirements; and • assessment as a “qualifying CCP” (QCCP) could be made more difficult and uncertain, should the Local Rule’s requirements be seen as different from, or potentially imposing lower standards than, the PFMIs. The commenter expresses that the stated purposes of the proposed Local Rule could be achieved by requiring direct compliance with the international standards, and only adding to a proposed Local Rule the additional requirements that would be unique to a province. Unified approach to rule-drafting A commenter is concerned that the complexity of analyzing the differences between the proposed Local Rule and the PFMIs would be magnified by the impact of each jurisdiction enacting its own rule. The commenter calls for a unified approach to drafting and implementing the proposed Local Rule amongst the provincial/territorial regulators. 6 A reference to a provision (i.e., section, subsection, paragraph, etc.) is a reference to a provision of the proposed Local Rule, unless otherwise indicated. 7

Theme/question 6 Summary of comments Requirements pursuant to existing One commenter says that it was unclear whether certain recognized/exempt terms and conditions clearing agencies would be required to continue to comply with an existing term and condition that requires compliance with the PFMIs, possibly in addition to the proposed Local Rule. Foreign-based entities’ compliance A commenter is concerned that the proposed Local Rule is not clear whether with proposed Local Rule, and foreign-based clearing agencies that are recognized in a province will be equivalence and mutual recognition required to comply with all new provisions, or may continue to abide by approaches terms and conditions in their existing recognition orders. The commenter notes that adhering to the proposed Local Rule’s Part 3 provisions would be duplicative and inefficient when considering the regulation in a home jurisdiction, whereas current terms and conditions already address the balance with the home jurisdiction’s regulation. Two commenters highlight a need for access to third-country markets / clearing agencies under the concepts of equivalence and mutual recognition. One commenter suggests that an equivalence test be based on transparent, proportionate, fair and objective grounds, and should be judged on an outcome-determinative basis that looks to the PFMIs for guidance, so as to recognize the differences in legal and regulatory structures around the world. The commenters advocate for a process similar to the EMIR scheme for the recognition of third country CCPs, which relies on an equivalence assessment of the home country’s legal and regulatory structure and an MOU between ESMA and the relevant regulator. The commenters also note that terms and conditions would have to be appropriate in light of the supervision and oversight being carried out in multiple jurisdictions, and that reliance should be placed on the regulations in the home jurisdictions to implement the PFMIs in place of direct application of CSA requirements on third country CCPs. Part 2: Clearing agency recognition or exemption from recognition Request Notice question 1: Are A commenter notes that the proposed definition should include (a) the extent there other factors that could be to which failure of a clearing agency would require the use of public funds to considered in determining systemic maintain the stability of Canada’s financial infrastructure, and (b) the impact importance of a clearing agency to a clearing agency failure would have on Canada’s financial infrastructure. the relevant province? If so, please describe such factors and your A commenter notes that it would be useful to view the criteria within the reasons for including them. context of the currencies in which an FMI’s obligations are denominated, since any effects in Canada may depend on the value of an FMI’s CDN Subsections 2.0(2)-(5) of the dollar-denominated transactions. proposed CP – systemic importance A commenter suggests that the linkages between the clearing agency and other CCPs should be considered, including instances in which they assume exposure to one or more CCPs, as well as how such exposures are managed. A commenter suggests that any risk exposure of the clearing agency to counterparties that are not residents of a relevant province but are systemically important to those residents should be considered. 8

Theme/question 6 Summary of comments A commenter highlights the absence of an appeal mechanism for parties who wish to have their determination of systemic importance reviewed. Significant changes and other A commenter notes that the advanced approval requirement for significant changes in information changes and notification of fee changes is inconsistent with international regulations and thus puts domestic clearing agencies on an uneven playing Section 2.2 field relative to foreign-based clearing agencies, who may make such changes more quickly. The commenter describes that CFTC regulations for derivatives clearing agencies, for example, require only self-certification of rule changes with the CFTC 10 business days in advance of the change. The commenter requests aligning the requirements with those of the CFTC. Filing of initial audited financial A commenter notes that while it plans to adopt the use of IFRS in the near statements future, it currently prepares its financial statements in accordance with UK GAAP, as per its home regulator’s requirements. It requests confirmation Section 2.4 that the provincial/territorial regulators will flexibly implement s. 2.4 to allow conformation with local regulatory requirements and that the provision will not negatively impact its operations in the relevant province. Filing of annual audited and interim A commenter urges the provincial/territorial regulators to extend the financial statements approach taken under s. 2.2 – to allowing alternate means to meeting the provision’s requirement for foreign-based entities, as specified in its Section 2.5 recognition/exemption order – to the requirements of s. 2.5. The commenter notes that some home country regimes do not require interim financial statements to be audited. Part 3: On-going requirements applicable to recognized clearing agencies Section 3.2 – Governance Joint Supplementary Guidance Box A commenter felt that the statement “the FMI functions should be legally 2, Item 1 separated from other functions performed by the consolidated entity in order to maximize bankruptcy remoteness of the FMI functions” does not align Subsection 3.2(2) of the proposed with the PFMIs paragraph 3.2.6. The commenter interprets that the PFMIs CP describe legal separation as a consideration when services present a distinct risk profile from, or pose additional risks to, its existing functions. So, whereas legal separation may be effective for multi-functional risks on a case-by-case basis, it is just one mechanism, in addition to, for example, effective governance and containment of risk through contractual terms. Role of the chief compliance officer A commenter feels that the requirement could impose significant effort and cost on a clearing agency registered in multiple jurisdictions. Alternatively, Paragraph 3.2(7)(d) the commenter proposes that recognized foreign clearing agencies be able to leverage similar information/reports provided to other regulators or information in its CPSS-IOSCO FMI Disclosure Framework Document. Transparency of major decisions A commenter proposes that, before a major decision that has a potential broad market impact is published, the clearing agency should be permitted to Subsection 3.2(13) make a case for non-publication on the grounds of possible negative impact to financial stability in any of the jurisdictions in which it operates. Also, the publication should be made only with the approval of a relevant home- 9

Theme/question 6 Summary of comments jurisdiction regulator and/or regulator of any other impacted jurisdiction. A commenter also notes that it would make sense that ss. 3.2(13) should only apply to determinative decisions of a clearing agency’s Board, since other (more preliminary or interim) resolutions may be confusing, misleading or inappropriately market-moving. Section 3.5 – Collateral and Section 3.7 – Liquidity risk Collateral – general principle A commenter says it is essential that letters of credit be perceived as permitted collateral, notwithstanding that the wording of the provision does Subsection 3.5(1) not specifically suggest otherwise. The commenter requests positive clarity that letters of credit are intended to be included. Collateral and liquidity risk A commenter requests flexibility in the eligible collateral a clearing agency can accept, as certain financial industries, such as the life insurance industry, Sections 3.5, 3.7 tend to hold long-dated corporate securities to support the long-term nature of their activities. The commenter suggests that such participants would incur significant costs in obtaining more liquid assets to post as collateral with a clearing agency. It requests that long term assets, such as high grade corporate bonds, be considered eligible. Qualifying liquid resources With respect to par. 3.7(8)(a), a commenter notes that there is minimal liquidity risk with respect to major currencies and any potential concerns Subsections 3.7(8) and (9) could be addressed through a foreign haircut allowance, if necessary. The commenter interprets that PFMIs paragraph 3.7.10 contemplates holding liquid resources in more than one currency, but does not strictly require that the currency of liquid resources must exactly match the currency of the obligations. Further, if highly marketable collateral held in investments are permitted, given the standardization and marketability of major currencies, it does not seem reasonable to require that cash must be held in the same currency of the obligation. With respect to par. 3.7(8)(b), a commenter requests that committed lines of credit be expanded to include letters of credit, as they are committed obligations of an underwriting bank. With respect to par. 3.7(8)(e) and the posting of bonds as collateral, a commenter notes that it is not clear what is included as “highly marketable collateral” or what funding arrangements would qualify as prearranged and highly reliable. The commenter is concerned that should customers not be able to post bonds as collateral with clearing members, because they in turn cannot post bonds to a clearing agency, customers or clearing members will be required to enter into repurchase transactions to raise cash to post, which may impose additional costs without reducing systemic risk. Section 3.13 – Participant default rules and procedures Use and sequencing of financial A commenter asserts that it is not practical for a clearing agency to pre­ resources commit to use particular liquidity resources in a specific order; rather the use of various resources to meet time-sensitive needs will depend on the details Subsection 3.13(3) of a default situation. Also, the inclusion of such a hierarchy in publicly disclosed rules (or only to members) could make the clearing agency vulnerable to gaming by market participants. Accordingly, any plan for using 10