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TORONTO (Reuters) - Canada will allow market players to use either global or local central counterparties (CCPs) to clear standardized over-the-counter derivatives, the country's central bank said on Monday.
Central counterparties guarantee against default should one party in a contract, trade or investment be unable to pay.
There are no CCPs in Canada now for the over-the-counter (OTC) derivatives market, and the Bank of Canada spent more than a year studying whether to develop a domestic CCP or work with an offshore player to set one up for the market, which does estimated C$9 trillion ($9.2 trillion) in business each year.
The bank said it was committed to having standardized OTC contracts cleared through central counterparties (CCPs). Bank Deputy Governor Timothy Lane said last year that Canada's OTC market was systemically important and the absence of CCPs was a glaring weakness in its regulatory framework.
"Canadian market participants can respect this commitment by clearing OTC derivatives using any CCP recognized by Canadian authorities, including global CCPs," the Bank of Canada said in a statement.
One of the characteristics an offshore CCP must have to win approval from Canadian policymakers is a cooperative oversight arrangement involving "relevant authorities," the bank said.
The offshore CCP must also guarantee fair and open access by market participants, have resolution and recovery regimes to ensure it continues to function in times of crisis, and have appropriate emergency liquidity arrangements in the currencies in which it clears.
"Canadian authorities are satisfied with the direction and pace of the international efforts on the four safeguards, including with regard to implementation at global CCPs serving the Canadian market," the bank said.
The announcement is expected to be welcomed by trading desks, particularly at international banks, because it offers flexibility and would likely be cheaper in many cases for them to use a global CCP rather than one set up just for Canada.
The reform of the OTC market is part of global overhaul of financial rules initiated in 2009 by the Group of 20 advanced and emerging economies to prevent future meltdowns in the financial system.
(Reporting by Jeffrey Hodgson; With additional reporting by Louise Egan in Ottawa; Editing by James Dalgleish; and Peter Galloway)
This story corrects to show Lane made comments in 2011