Bank of Canada says to oversee SwapClear due to systemic risk

Tue Mar 26, 2013 11:10am EDT

* SwapClear being used more in Canada to clear rate swaps

* Part of broader G20 commitment on regulation

OTTAWA, March 26 (Reuters) - The Bank of Canada said on Tuesday it would formally regulate SwapClear, the dominant global system for centrally clearing over-the-counter interest rate swaps, because it has the potential to pose systemic risk to the Canadian financial system.

The announcement came the same day Canada's banking watchdog designated the country's top six banks as being of systemic importance.

Both moves are part of a broader commitment that Canada and other Group of 20 rich and developing nations made following the financial crisis to toughen financial industry oversight and regulation.

"Clearing activity of Canadian institutions in SwapClear has increased substantially, in line with Canada's G-20 commitment to centrally clear all standardized OTC derivatives," it said in a statement.

It added that there was potential for more growth, given the decision by Canadian authorities that any central counterparty that they recognize and that clears over-the-counter derivatives can be used by Canadian market participants, subject to safeguards.

SwapClear, established in 1999, is operated by LCH.Clearnet, a majority stake in which is being acquired by the London Stock Exchange Group PLC.

The Bank of Canada determined that SwapClear had the potential to pose systemic risk to the Canadian financial system because of its dominance in clearing interest rate swaps, and significant counterparty exposures of Canadian banks that are concentrated on SwapClear.

"The designation of SwapClear represents a significant milestone towards achieving a safer and more resilient financial system for Canadian participants," Governor Mark Carney said in a statement.

"Our involvement in the oversight of SwapClear, to ensure strong risk management prevails, will enable Canada to reap the benefits of the central clearing of OTC (over-the-counter) interest rate derivatives, as envisioned by the G20."