2017 Update on Canadian OTC Derivatives Regulatory Reforms SEPTEMBER 2017

Transcription

1 2017 Update on Canadian OTC Derivatives Regulatory Reforms SEPTEMBER 2017

2 table of contents 03 Introduction 04 Regulatory Margin Requirements 07 Mandatory Clearing 09 Trade Reporting/Public Dissemination 10 Business Conduct 11 Other Developments 11 Conclusion 12 Appendix A: Overview Canadian Derivatives Reform 13 Appendix B: Canadian Regulatory Structure for OTC Derivatives Rulemaking 13 Appendix C: Regulatory Margin Rules 15 Appendix D: Mandatory Clearing 19 Appendix E: Trade Reporting and Public Dissemination of Trade Information 20 Appendix F: Proposed Business Conduct Rules 21 Appendix G: Segregation and Porting Rules Overview of Key Protections on Customer Collateral 22 Glossary

3 introduction In this fourth edition, our 2017 update on domestic regulatory reforms to the over-the-counter (OTC) derivatives market focuses on the tail-end of OTC derivatives regulatory reform in the Canadian markets. In the eight years since the Group of 20 s landmark commitment to reform OTC derivatives markets, these markets have evolved in line with global regulations with rules in place for clearing, reporting and margin. Despite increased regulatory pressures, the size of the Canadian OTC derivatives markets have more than doubled during this same period, driven mainly by growth in interest rate derivatives. 1 This report provides an update on the regulatory margin rules, trade reporting and the mandatory clearing of OTC derivatives. The report also looks forward to what is to come, including the proposed business conduct rules that may have a significant impact on the Canadian markets. While most of these regulatory reforms cover most significant OTC derivative asset classes, we note that at this time the Canadian clearing mandate is only limited to rates derivatives. DESPITE INCREASED REGULATORY PRESSURES, THE SIZE OF THE CANADIAN OTC DERIVATIVES MARKETS HAS MORE THAN DOUBLED DURING THIS SAME PERIOD, DRIVEN MAINLY BY GROWTH IN INTEREST RATE DERIVATIVES. Please see Appendices A(I) and A(II) for an overview of the progress of the Canadian Securities Administrators (CSA) OTC derivatives regulatory reforms and a timeline of upcoming regulatory dates. See Appendix B for an outline of the regulatory structure for OTC derivatives rulemaking in Canada. 1 Bank of Canada, Financial System Review: Toward More Resilient Markets: Over-the-Counter Derivatives Reform in Canada (December 2016), page 54, 3 RBC CAPITAL MARKETS

4 regulatory margin requirements Overview Regulatory margin requirements (Margin Rules) for non-cleared derivatives trades were introduced for the largest derivatives users on September 1, 2016 in the US, Japan and Canada, with the EU rules going live on February 6, Australia, Hong Kong and Singapore rolled out their regimes on March 1, Under these rules, phase-one firms (i.e. the largest global banks and dealers) are required to exchange initial margin (IM) and variation margin (VM) when trading non-cleared derivatives with each other. VM requirements came into effect for many of our larger financial clients 3 from March 1, 2017 with IM requirements to be phased in over a five year period from September 1, 2016 to September 1, See Figure 1 for the phase-in schedule for the Margin Rules. In Canada, the Office of Superintendent of Financial Institutions (OSFI) acts as the supervisor and principal regulatory authority of federally regulated financial institutions (FRFIs), including RBC, in respect of the Margin Rules. Changes to the OTC Derivatives Markets The Margin Rules have transformed OTC derivatives markets and have fundamentally shifted the way OTC derivatives are traded. Before these rules came into force, market participants would make a commercial decision to exchange IM and VM (if at all). Market participants with a high credit rating would typically negotiate for non-standard clauses (e.g., high threshold amounts and in some limited cases, one-way collateral posting). The Margin Rules standardise a number of elements of collateral exchange including requiring a two-way exchange of IM and VM regardless of the balance-sheet strength of the counterparties and setting regulatory standards on thresholds, collateral haircuts, types of eligible collateral and timing of the exchange of collateral. Further, IM is now calculated based on market risk of the OTC derivative rather than the counterparty credit risk. FIGURE 1: PHASE-IN OF MARGIN EXCHANGE IM & VM-Year 1 Sept VM-Year 2 Mar IM-Year 2 Sept IM-Year 3 Sept IM-Year 4 Sept IM-Year 5 Sept VM Relief Mar 1 Aug 31, 2017 >US$3.0T All other > 2.25T > 1.5T > 0.75T > 8.0B covered >C$5.0T entities >US$2.25T >US$1.5T >US$0.75T >US$8.0B >C$12B >C$3.75T >C$2.5T >C$1.25T >C$12B IM & VM Feb > 3.0T 2 Hong Kong and Singapore granted a six-month transition period during which they expect progress in compliance for both IM (largest in-scope entities) and VM (all in-scope entities). Australia requires compliance for the largest in-scope entities from March 1, With respect to VM, there was a six-month transition period for in-scope entities, but all trades executed after March 1st require back loading for VM exchange by September 1, Non-financial entities are exempt counterparties under OSFI s Margin Rules. 4 RBC CAPITAL MARKETS

5 As our clients are brought into scope of the IM requirements, our clients will need to develop familiarity with the International Swaps and Derivatives Association (ISDA) Standard Initial Margin Model (SIMM) 4 for non-cleared derivatives, the requirement to open segregated custody accounts and signing agreements with custodians that would hold IM on their behalf. 5 IM may be calculated using either a standardized IM schedule or an IM model. The standardised IM schedule sets the IM requirement as a percentage of notional exposure of each transaction. The percentage applicable depends on the asset class and term of the transaction (e.g., interest rate derivatives with 0 2 years remaining in maturity require a 1% of notional exposures as IM). For our clients that wish to use IM models, we expect that vendor solutions 6 will emerge over time in addition to the ISDA SIMM that will be right sized for their needs. 7 From RBC s experience, the set-up of custody accounts, including negotiating the custody agreements can be time consuming. Thus, early engagement with custodians is important to ensure that there are no operational delays for OTC derivatives trades. It should be noted that there are currently only four custodians that are able to handle the herculean task of managing collateral for all OTC derivatives market participants globally: Euroclear Bank, J.P. Morgan Chase, Clearstream International and Bank of New York Mellon. Further, the Margin Rules increases both the amount of collateral needed and the speed with which it must be transferred to counterparties. This, in turn, increases the pressure on some market participants to pre-fund collateral for OTC derivatives trades or hold additional collateral at a custodian so that collateral can be transferred promptly when required. Substituted Compliance The OSFI, the US Prudential Regulators 8 and EU Margin Rules all allow for substituted compliance to avoid duplicative or conflicting margin requirements on a single set of transactions. For example, under the OSFI Margin Rules, RBC may comply with margin requirements applicable to a foreign counterparty if OSFI determines that a foreign jurisdiction s margin requirements are comparable to the Basel Committee on Banking Supervision and the Board of the International Organizations of Securities Commissions (BCBS/IOSCO) margin requirements. OSFI Margin Rules permit substituted compliance for both collecting and posting of margin. US Prudential Regulator Margin Rules require a US person to collect margin in line its rules and regulations; however, in some circumstances US persons may post margin under foreign Margin Rules. The substituted compliance framework is a welcome addition to the global Margin Rules; one that will significantly reduce the potential for duplicative and overlapping requirements in transactions with foreign counterparties and facilitate cross-border margin exchange. ISDA Self-Disclosure Letter If you have not already done so, we ask our clients that intend to trade in-scope OTC derivatives with us to respond to our client outreach efforts through Markit ISDA Amend or via and provide us with the ISDA Regulatory Margin Self-Disclosure Letter (the Self-Disclosure Letter). The Self-Disclosure Letter helps us determine in regards to each client: (i) the margin regulations to which our trades are subject; and (ii) if the exchange of IM is required (and if so on what date). The letter, together with the information on products our clients intend to trade, will help us determine which clients are in-scope of the Margin Rules. We urge our clients to complete the documentation as early as possible to avoid any disruption to their services with RBC. Clients will only need to complete the Self-Disclosure Letter once and this letter can be used to make representations as to their status under the Margin Rules to all of their other counterparties as well. Once we determine which clients are in-scope of the Margin Rules, legal documentation, including the ISDA Master Agreement for OTC Derivatives and regulatory compliant credit support documents, will need to be negotiated. For ease of reference, please refer to Appendices C(I) and C(II) for a list of the types of entities and OTC derivatives products that are in-scope of the 4 ISDA SIMM was developed ahead of the Margin Rules phase-one deadline and provides a common methodology for the calculation of IM for a number of asset classes, including interest rates, credit, equity, commodity and FX derivatives. Under the Margin Rules, IM models must be re-calibrated on an annual basis, with back-testing required to validate the model to ensure that the model calibrations lead to IM amounts that adequately reflect risk. 5 The requirement to segregate IM is a regulatory requirement. 6 For example, AcadiaSoft s Exposure Manager for IM and TriOptima s triresolve. 7 Under the US rules, a firm s use of an IM model requires approval of the US Prudential Regulators. Under the European Commission s proposed amendments to the European Market Infrastructure Regulation, the use of an IM model requires the initial and ongoing approval of the European Securities and Markets Authority (ESMA). 8 The US Prudential Regulators are as follows: Office of the Comptroller of the Currency; Federal Reserve System; Federal Deposit Insurance Corporation; Farm Credit Administration; Federal Housing Finance Agency Variation. 5 RBC CAPITAL MARKETS

6 Canadian, US and EU rules. Please also refer to our October 2016 Client Report Update on OTC Regulatory Margin Requirements: Focus on Canada for an in-depth discussion on the Margin Rules (this report provides an overview of IM, VM, and other relevant concepts). Temporary Variation Margin Relief (Expired) The simultaneous implementation of VM requirements for a large segment of the OTC derivatives markets on the same date created a tremendous operational burden on all banks and market participants worldwide. As the March 1st date approached, it became increasingly clear that many market participants globally would not be able to complete the required regulatory documentation in time and were at a risk of being shut out of the OTC derivatives markets. RBC along with other global banks and other market participants sought regulatory relief to prevent market disruption, particularly for buy-side participants such as pension plans, insurance companies and asset managers that depend on OTC derivatives for risk management purposes. Based on concerted advocacy efforts, certain global regulators granted temporary, conditional relief of up to six months during which regulators would not deem in-scope OTC derivatives trades that are entered into on or after March 1, 2017 without the regulatory compliant documentation to be out of compliance with the Margin Rules. 9 OSFI s relief from compliance with the VM requirements expired on September 1, RBC ALONG WITH OTHER GLOBAL BANKS AND OTHER MARKET PARTICIPANTS SOUGHT REGULATORY RELIEF TO PREVENT MARKET DISRUPTION... BASED ON CONCERTED ADVOCACY EFFORTS, OSFI AND OTHER LARGE GLOBAL REGULATORS GRANTED TEMPORARY, CONDITIONAL RELIEF THAT EXPIRED ON SEPTEMBER 1, Canadian, US, and EU regulators provided limited and temporary regulatory relief from the March 1, 2017, VM requirements that permitted trading to continue with undocumented counterparties that did not represent significant exposure as long as efforts were taken to complete regulatory compliant margin documentation as soon as possible. 10 The VM relief granted by the US regulators (both US Prudential Regulators and the Commodities and Futures Commission) also expired on September 1, RBC CAPITAL MARKETS

7 mandatory clearing Overview of Mandatory Clearing Rules In April of this year, Canada joined the US, the EU, Japan, Australia, South Korea and China in introducing a clearing mandate for certain OTC derivatives. The Japanese regulators were the first to introduce a limited clearing mandate in November 2012; the US regulators followed suit in March In the US, the clearing mandate was initially limited to interest rate derivatives and credit default swap indices and targeted swap dealers and private funds. Over the next three years, the US regulators have expanded the list of in-scope products (e.g., expanded interest rate derivatives to include additional currencies such as Hong Kong Dollar, Polish Zloty and Norwegian Krone). The in-scope counterparties under the EU mandate is even broader and includes most financial entities (e.g., banks, insurance companies and funds) and nonfinancial entities that exceed certain notional OTC derivatives thresholds. Please refer to Appendix D(I) for an overview of global mandatory clearing regimes and Appendix D(II) for a list of inscope derivatives products under the Canadian, US, and EU rules. In contrast to the US and EU mandates, the Canadian mandate is limited to clearing members of central counterparties (CCP) recognized or exempted from recognition by the CSA. In-scope products are limited to rates derivatives denominated in CAD, USD, EUR, and GPB. See Figure 2 for an overview of in-scope counterparties and in-scope products under the Canadian mandatory clearing rules. We expect that most of our clients will not be materially impacted by the Canadian clearing mandate, as the Canadian rules only currently apply to direct clearing members. In August 2018, the clearing mandate will expand to include affiliates of clearing members with month-end OTC derivatives gross notionals outstanding greater than CAD 1 billion (excluding intra-group trades) and local counterparties 11 (other than the affiliates of clearing members) with month-end OTC derivatives gross notionals outstanding, combined with each of their local affiliates, greater than CAD 500 billion (again, excluding intra-group trades). FIGURE 2: CANADIAN MANDATORY CLEARING RULES: FOR A TRADE TO BE SUBJECT TO MANDATORY CLEARING, BOTH COUNTERPARTIES AND THE TRADE INSTRUMENT MUST BE IN-SCOPE OF THE MANDATORY CLEARING RULES. Effective Date In-Scope Counterparties In-Scope Products April 4, 2017 August 20, 2018 Counterparties that are members of a regulated clearing agency that offers clearing services in respect of the in-scope product and that subscribe to clearing services for the class of derivatives to which the in-scope product belongs. Affiliates of a clearing member with month-end OTC derivatives gross notionals outstanding greater than CAD 1 billion (excluding intra-group trades). Local counterparties (other than an affiliate of a clearing member) with month-end OTC derivatives gross notionals outstanding, combined with each of their local affiliates, greater than CAD 500 billion (excluding intra-group trades). Fixed-to-Float Interest Rate Swaps 28D 30Y (CAD) 28D 50Y (EUR, GBP, USD) 12 Basis Interest Rate Swaps 28D 50Y (EUR, GBP, USD) 12 Overnight Index Interest Rate Swaps 7D 2Y (CAD) 7D 3Y (EUR, GBP, USD) 12 Forward Rate Agreements 3D 3Y (EUR, GBP, USD) 11 A local counterparty is a person or company (other than an individual) who is organized, has its head office or has its principal place of business in a Canadian jurisdiction. This definition also includes affiliates of these local counterparties where the local counterparty is responsible for all or substantially all its affiliates liabilities. 12 Product is already subject to mandatory clearing under the US and/or the EU rules. 7 RBC CAPITAL MARKETS

8 Notably, we observe that clearing volumes have increased ahead of the clearing mandate in many cases. For example, Canadian banks were clearing nearly 80% of interest rate derivatives by the end of second quarter of 2016, well in advance of Canadian clearing mandate being in place. Further, Canadian banks clear 15% of credit derivatives despite there being no clearing mandate in place. 13 RBC expects that Canadian regulators may revaluate notional thresholds overtime and could lower thresholds in the future to bring additional local counterparties into scope of the clearing mandate. Similar to the experience in US and elsewhere, it is our expectation that the Canadian mandate may also be increased to include additional asset classes (e.g., credit derivative swaps indices and other currencies). The clearing mandate does not apply to pre-existing transactions. However, a material amendment to an in-scope derivative will trigger the clearing requirement. A material amendment to a trade is anything that can reasonably be expected to have a significant effect on the derivative s attributes, including: (i) its notional amount, (ii) the terms and conditions of the contract evidencing the derivative, (iii) the trading methods or (iv) the risks related to its use. See Figure 3 for a list of examples of material amendments. ISDA Canadian Clearing Classification Letter While we do not expect many of our clients to be in-scope of the Canadian clearing mandate, because of regulatory obligations, RBC will require some of our clients to provide us with an ISDA Canadian Clearing Classification Letter (the Classification Letter) to confirm that they are out-of-scope of Canadian clearing mandate. The Classification Letter also puts a positive obligation on counterparties to notify dealers, including RBC, once such counterparties are brought into scope of the Canadian mandate in the future (e.g., the Canadian mandate expands to include additional market participants). RBC is diligently working with ISDA and other Canadian banks to minimize the operational burden on our clients through a common industry solution. We will provide an update on these developments when appropriate. FIGURE 3: MATERIAL AMENDMENTS Material Amendments Includes any modification which would result in: a significant change in the value of the derivative, differing cash flows, a change to the method of settlement, and the creation of upfront payments. 13 Almost all standard OTC derivatives trades between dealers in Canada are cleared. 8 RBC CAPITAL MARKETS

9 trade reporting/public dissemination Overview of public dissemination requirements in Canada On October 14, 2015, trade reporting began in the provinces of Québec, Ontario and Manitoba. The remaining Canadian provinces and territories implemented trade reporting requirements on July 29, On January 16, 2017, certain trade data began to be publically disclosed in all Canadian provinces and territories. Regulators view the public dissemination of trade information as an important component of the trade reporting reforms to increase transparency of OTC derivatives trading in Canada. Please see Figure 4 for the types of trade information publically disclosed. FIGURE 4: TRADE INFORMATION THAT IS SUBJECT TO PUBLIC DISSEMINATION Trade Information Instrument Type Asset Class Underlying Benchmark Currency Pricing Terms Notional Size Cleared/Non-Cleared Status Execution Timestamp Public dissemination applies only to the most liquid OTC derivatives products (e.g., vanilla interest rates swaps and certain credit default swap indices). See Appendix E(I) for a list of product asset classes that are subject to public dissemination. Publicly disseminated trade data is anonymized, subject to capping and rounding of reported notional amounts. See Appendix E(II) and E(iii) for an overview of the rounding and capping methodology for publically disseminated trade data, respectively. for a 48-hour delay prior to dissemination to account for the much smaller Canadian OTC derivatives marketplace. (The 48-hour delay is put into place to preserve the integrity of the Canadian OTC derivatives markets and prevent market participants from using this data improperly to game the markets.) Canadian trade data is disseminated by the Depository Trust & Clearing Corporation (DTCC) and is available at: com/gtr/canada/dashboard.do. US trade data, similarly provided by DTCC, is available at: dashboard.do. As a final comment on public dissemination, while the US trade data is harvested regularly by market participants for intelligence on OTC derivatives, at this time, there has been a more limited use of the publicly available trade data in the Canadian markets. We expect that as more market participants become familiar with the publically available Canadian trade data, there will be an uptick in its use by Canadian OTC derivatives users. Legal Entity Identifier (LEI) Requirement The Legal Entity Identifier is the global standard code for identifying entities that trade in certain financial products. The Canadian trade reporting rules require each transacting party to obtain, maintain and renew the LEI. The service providers that issue LEIs generally require that they be renewed annually. To be compliant with Canadian law, clients that wish to trade derivatives with RBC will be required to have an LEI and to complete an ISDA Canadian Trade Representation Letter (the latter can be submitted via Markit ISDA Amend or ). Clients who have not already obtained an LEI can do so through one of several globally endorsed providers. 15 Clients who have obtained an LEI to satisfy foreign trade reporting rules, for example in the US or EU, can use the same LEI for Canadian trade reporting. Canada and the US are currently the only jurisdictions that require the public dissemination of trade data. While the US rules require real-time dissemination of trade data, 14 the Canadian rules allow 14 Although DTCC s US trade reporting is classified as real-time dissemination, most trades are subject to a 15 minute delay from the time the trade is executed. 15 One such provider is the Global Markets Entity Identifier Utility, whose LEI registration process can be performed entirely online through 9 RBC CAPITAL MARKETS

10 business conduct Overview of the Proposed Business Conduct Rules On April 4, 2017, the CSA published Proposed National Instrument Derivatives: Business Conduct (the Proposed Business Conduct Rules). These rules would impose business conduct requirements on derivatives dealers and derivatives advisers and are modelled after the business conduct regime under the US Dodd- Frank Act. The proposed rules are also similar to existing market conduct requirements under Canadian securities law. Please see Appendix F(I) for a list of concepts related to the Proposed Business Conduct Rules and Appendix F(II) for an overview of the conduct obligations. At this time, no implementation timeline for the Proposed Business Conduct Rules has been set. A business trigger test would be used to determine if a market participant is a derivatives dealer or a derivatives adviser. The business trigger for classification as either a derivatives dealer or a derivatives adviser would be broad and include: (i) quoting prices or acting as a market maker; (ii) frequent trading or advising on derivatives with an intention to profit; (iii) transacting in derivatives with the intention of being compensated. Unlike the US Dodd-Frank business conduct rules, there would be no quantitative thresholds to determine if a market participant is a derivatives dealer under the Proposed Business Conduct Rules (e.g., only swap dealers with notional trading over USD 8 billion in OTC derivatives are subject to the business conduct requirements in the US). Historically, derivatives market participants have traded with their counterparties on a non-reliance basis a market participant undertakes few, if any, specific duties with respect to its counterparty. However, if the Proposed Business Conduct Rules are implemented in their current form, a market participant deemed to be a derivatives dealer or a derivatives advisor would owe specific obligations to its counterparties. Depending on the counterparty, such obligations would include reporting daily valuations of derivatives, limitations on the use and investment of counterparty s assets (such as margin posted in respect of the trade), and broad pre-trade disclosures on risk, product, price and compensation (including spreads). Derivatives dealers and derivatives advisors would also be required to put into place robust compliance and record keeping policies and procedures. Our clients would need to carefully review their OTC derivatives trading activity to determine if they could be classified as a derivatives dealer or derivatives adviser. Exemptions There would be exemptions under the Proposed Business Conduct Rules for foreign derivatives dealers and foreign derivatives advisers that are registered in the jurisdictions which appear in the appendices of the rules (which are currently blank) and do not solicit business from non-sophisticated clients. 16 It is our understanding that the CSA intends to review the business conduct rules in the US and the EU for equivalence with the Proposed Business Conduct Rules. Even where foreign dealers or advisers would be exempt, such dealers or advisers would have to submit to the jurisdiction of CSA (including, for example, making their books and records available to the CSA upon request). There would also be an end-user exemption for derivatives participants that do not engage in the business trading derivatives as a derivatives dealer or a derivatives adviser; however, please see our comments below on the impact to OTC derivatives markets. Impact on the OTC Derivatives Markets While the end-user exemption mentioned above is welcome, the business trigger test used to determine if a market participant is a derivatives dealer or a derivatives adviser is ambiguous and overly broad. Under the current definition of a derivatives dealer, there is concern that a market participant that regularly trades derivatives with an intention to profit could be classified as a derivatives dealer. For example, some end-users, such as oil and gas companies, that predominantly hedge foreign exchange (FX) or interest rate risk and also take a directional view on commodities could be classified as derivatives dealers. RBC and other market participants provided written comments on the Proposed Business Conduct Rules and advocated for additional clarity on a number of items, including a more bright line test for a determining who is a derivatives dealer (such that there is no ambiguity between end-users and derivatives dealers). We advocated that the derivatives dealer definition should be narrowed to only capture OTC derivatives users that make markets in OTC derivatives. 16 The Proposed Business Conduct Rules define sophisticated market participants as Eligible Derivatives Parties who do not require the full set of business conduct protections. These include: (i) governments, pension funds, financial institutions, other derivatives dealers and derivatives advisers; and (ii) individuals/corporations who: (a) state in writing that they have the requisite knowledge and experience about derivatives; and (b) with net assets of at least $5 million (for individuals) and $25 million (for corporations). 10 RBC CAPITAL MARKETS

11 other developments conclusion Dealer Registration Later this year, we expect that the CSA will issue proposed dealer registration rules (the Proposes Dealer Registration Rules) that we understand will be similar to the dealer registration requirements under the US Dodd-Frank Act. It is important to note here that the Proposed Business Conduct Rules will apply to a derivatives dealer, regardless of registration obligations under the Proposed Dealer Registration Rules. Segregation and Porting Rules for Customer Collateral In line with a broader push to promote central clearing of OTC derivatives, the CSA has finalized rules aimed at broadening access to central clearing while protecting customer collateral and positions. NI Derivatives: Customer Clearing and Protection of Customer Collateral and Positions (the Segregation and Porting Rules) widens the acceptable customer clearing models, allowing market participants to access clearing services by becoming a member of a central counterparty or using a clearing intermediary (CI). 17 These rules came into force on July 3, In the past 12 months, Canadian OTC derivatives markets were transformed by the regulatory margin requirements, the introduction of the clearing mandate and continued evolution of the trade reporting regime. Our assessment based on the abovenoted developments is that derivatives reform implementation is nearing its completion in Canada. RBC will continue to closely monitor reforms that remain, including the Proposed Business Conduct Rules and the upcoming Derivatives Dealer Registration requirements. We would also like to see continued harmonization in OTC derivatives regulatory approach both domestically and internationally such that regulators recognize each other s rules as equivalent on an outcomes basis. In this respect, CFTC s Project Kiss, as an example, is a good first step to ensure that the OTC derivatives markets operate safely and efficiently. Platform Trading In the US, the Commodities and Futures Commission (CFTC) is undertaking a holistic review of all CFTC rules, regulations and practices to make them simpler, less burdensome, less costly and seek cross-border harmonization on an outcomes basis under a program entitled Project KISS. (Yes, regulators have a sense of humour as KISS stands for Keep it Simple, Stupid. ) Part of this review will include re-evaluating swap execution facilities (SEFs). The current CFTC s acting chair, J. Christopher Giancarlo is of the view that the existing regulatory regime for SEFs is over-engineered and improperly modelled on the US futures markets. (SEFs provide an electronic platform to trade swaps; the regulatory reform goal is to increase pre-trade transparency and improve regulatory oversight by moving trades to a regulated platform.) Thus, sweeping reforms are expected in respect of SEFs in the US In Canada, platform trading is still under regulatory considerations and we understand that the CSA are viewing with interest the developments south of the border, particularly the challenges SEFs have posed from a trade execution perspective. An open question remains whether platform trading is even suitable for the relatively smaller Canadian OTC derivatives markets. 17 Clearing intermediaries, typically banks and broker dealers, provide their customers access to clearing services. They themselves may be members of a CCP (direct clearing intermediary) or use the services of another clearing intermediary (indirect clearing intermediary). 11 RBC CAPITAL MARKETS

12 appendix APPENDIX A: CANADIAN DERIVATIVES REFORM I. Progress of CSA Derivatives Reform Rulemaking Area CSA Consultation Paper Model Rules Final Rules First Portions Implemented Trade Reporting June 2011 December 2012/ June 2013 November 2013 October 2014 Trade Reporting Public Dissemination of Trade Information Trade Reporting Legal Entity Identifier February 2016 February 2016 July 2016 January 2017 February 2016 February 2016 July 2016 July Segregation and Portability February 2012 January 2014/ January 2016 January 2017 July 2017 Mandatory CCP Clearing for OTC Derivatives June 2012 December 2013/ February 2015/ February 2016 January 2017 April 2017 Dealer Registration April 2013 Q Exchange and Platform Trading Margin and Collateral Requirements for OTC Derivatives 19 January 2015 July 2016 TBA Derivatives: Business Conduct Rules April 2017 April 2017 II. Key Near-Term Dates for Canadian OTC Derivatives Rulemaking Date September 1, 2017 Item Business Conduct Rules Deadline to comment on CSA proposal. Regulatory Margin Rules VM relief from the Office of Superintendent of Financial Institutions expires. Exchange of IM for Phase-2 firms begins. Q4, 2017 Dealer Registration Rules CSA is expected to publish its proposal. August 20, 2018 Canadian Mandatory Clearing Rules Mandatory clearing of in-scope products required when trading with affiliates of a clearing member with month-end derivatives gross notionals outstanding greater than CAD 1 billion (excluding inter-affiliate trades) and local counterparties (other than an affiliate of a clearing member) with month-end derivatives gross notionals outstanding, combined with each of their local affiliates, greater than CAD 500 billion (excluding inter-affiliate trades). 18 The LEI requirement was effective in Ontario, Quebec and Manitoba since October 31, Regulatory margin requirements have been effective in Canada since September 2016 through OSFI Guideline E-22 Margin Requirements for Non-Centrally Cleared Derivatives. 12 RBC CAPITAL MARKETS

13 APPENDIX B: CANADIAN REGULATORY STRUCTURE FOR OTC DERIVATIVES RULEMAKING Logo Name Office of the Superintendent of Financial Institutions Individual Provinces Canadian Securities Administrators Description Prudential regulator and supervisor for Federally Regulated Financial Institutions (FRFIs). Each provincial securities regulator or commission retains jurisdiction to regulate securities markets in their home province. Voluntary umbrella organization to improve, coordinate and harmonize regulation across provinces. Approach to Rulemaking Principles-based guidance for FRFIs activities on a consolidated basis. Rules applicable to market participants and activities in the local province. Frequent production of National Instruments applicable across provinces and territories. Rulemaking to Date OSFI B7 Guideline on derivatives sound practices. OSFI E-22 Guideline on margin requirements for non-centrally cleared derivatives. Product determination and trade reporting rules (e.g., OSC and MSC Rules and ). Multilateral trade reporting rule MI 91-MI 101 and Mandatory clearing rule NI and segregation/portability requirements for customer collateral NI A number of proposed National Instruments to be finalized. APPENDIX C: REGULATORY MARGIN RULES I. Covered Entities Concept Canada US Prudential Regulator Rules EU Margin Rules Covered Entities Continued Covered FRFIs must exchange margin with a counterparty that is a Covered Entity. Covered FRFI: an entity regulated by OSFI, which includes Canadian banks, trust and loan companies, cooperative credit associations and Canadian branches of non-canadian banks, with over CAD 12 billion in non-cleared derivatives (on a consolidated basis, excluding intragroup trades). Covered Entity is a Financial Entity with over CAD 12 billion in non-cleared derivatives (on a consolidated basis, excluding intragroup trades). Covered Swap Entities (CSE) must: - exchange IM and VM with a Swap Entity and a Financial End-User (FEU) with Material Swaps Exposure; and - exchange VM (but not IM) with a Financial End-User. A CSE is a Swap Entity that is regulated by a US prudential regulator. A Swap Entity is an entity that is registered as a swap dealer, major swap participant, securitybased swap dealer or major security-based swap participant. A FEU means a bank or other specified regulated financial entity or an investment company, securitization vehicle, or other specified investment pool. Financial Counterparties and Non-Financial Counterparties (NFCs) that exceed the thresholds set out below (i.e. NFC+) must exchange VM and IM with each other. Financial Counterparties include banks, broker-dealers, investment managers, certain funds and other types of financial entities. NFCs are counterparties that do not fall within the definition of a Financial Counterparty and are typically end-users of derivative products. 13 RBC CAPITAL MARKETS

14 Covered Entities Continued Concept Canada US Prudential Regulator Rules EU Margin Rules Covered Entities (continued) Financial Entities are entities whose main business includes the management of financial assets, lending, factoring, leasing, provision of credit enhancements, securitization, investments, financial custody, proprietary trading and other financial services activities. This includes (but is not limited to) deposit-taking institutions, insurance companies, pension funds, hedge funds, and asset managers. A FEU has Material Swaps Exposure if its average daily aggregate notional amount in non-cleared derivatives and physically settled FX swaps and forwards for June, July and August of the prior year, determined on a consolidated basis, is in excess of USD 8 billion (certain hedging transactions are excluded; trades with affiliates are counted only once). A NFC+ is a NFC that (together with its NFC affiliates) has exceeded one of the following clearing thresholds: (i) EUR 1 billion in gross notional value for OTC credit derivative contracts; (ii) EUR 1 billion in gross notional value for OTC equity derivative contracts; (iii) EUR 3 billion in gross notional value for OTC interest rate derivative contracts; (iv) EUR 3 billion in gross notional value for OTC foreign exchange derivative contracts; (v) EUR 3 billion in gross notional value for OTC commodity derivative contracts and other derivative contracts. Exempted Entities End-users that are not financial entities. Sovereigns, central banks, public sector entities, certain special purpose entities, certain multilateral development banks, Bank for International Settlements and Central Counterparties. Sovereigns, multilateral development bank, Bank for International Settlements, certain commercial end users and small banks below a certain size. NFC- entities (these are entities that are not NFC+ entities because they are below the thresholds above) EU, US and Japanese central banks and sovereigns, multilateral development banks and Bank for International Settlements. Inter-affiliate trades Inter-affiliate trades exempt VM: Collect from and post to affiliates IM: Collect from affiliates subject to USD 20 million IM threshold Local regulator can grant exemptions. II. In-Scope Products Instrument Type OSFI Guideline US Prudential Regulator Rules EU Margin Rules Interest Rate Swaps Yes Yes Yes Options Yes Yes Yes Swaption Yes Yes Yes Cross-Currency Swap Yes Yes Yes Foreign Exchange FX Forward Yes Yes Yes FX Swap Yes Yes Yes FX Non-deliverable Forward Yes Yes Yes FX Option Yes Yes Yes FX Spot No No No Continued 14 RBC CAPITAL MARKETS

15 In-Scope Products Continued Instrument Type OSFI Guideline US Prudential Regulator Rules EU Margin Rules Physically settled FX swaps No No VM, not IM Physically settled FX forwards No No VM, not IM (VM exempted until January 2018) Principal payments on cross-currency swaps VM, not IM VM, not IM VM, not IM Securities Swap based on securities Yes Yes Yes Swap based on broad index Yes Yes Yes Swap based on broad index Yes Yes Yes Option based on securities Yes No Option based on broad index Yes No Yes (exempted until December 2019) Yes (exempted until December 2019) Forward based on securities Yes No Yes Forward based on broad index Yes No Yes Commodities Swaps Yes Yes Yes Swap on commodity-based index Yes Yes Yes Weather, energy, or emissions swap Yes Yes Yes Physically settled forwards No No Some Trade options Credit Yes, but physically-settled commodity transactions exempted Based on single name Yes Yes Yes Based on index Yes Yes Yes Other Instruments Derivatives traded on futures exchange No No No Derivatives cleared on a recognized Central Clearing Counterparty Yes Some No No No APPENDIX D: MANDATORY CLEARING I. Comparison of Global Mandatory Clearing Rules Authority Canada US EU Australia Japan Singapore Hong Kong Canadian Securities Administrators CSA Commodity Futures Trading Commission CFTC European Securities and Markets Authority ESMA Australian Securities and Investments Commission ASIC Japan Financial Services Agency JFSA Monetary Authority of Singapore MAS Hong Kong Monetary Authority HKMA Status Final rules released January 19, 2017 Final rules released December 13, 2012 Final rules released December 01, 2015 Final Rules released December 04, 2015 Last amendment released July 2014 Consultation paper on draft rules published July 2015 Final rules announced February 05, 2016 Continued 15 RBC CAPITAL MARKETS

16 Comparison of Global Mandatory Clearing Rules Continued Participant Scope Canada US EU Australia Japan Singapore Hong Kong Members of a regulated clearing agency and that subscribe to clearing services for the class of derivatives to which the inscope product belongs. Affiliates of a clearing member with month-end OTC derivatives gross notionals outstanding greater than CAD 1 billion (excluding intragroup trades). Local counterparties with month-end OTC derivatives gross notionals outstanding (combined with their local affiliates) greater than CAD 500 billion (excluding intragroup trades) Financial Entities, which is defined as: A swap dealer A security-based swap dealer; A major swap participant; A major securitybased swap participant; A commodity pool; A private fund; and An employee benefit plan. Financial counterparties (FC) Non-financial counterparties above clearing threshold (NFC+) A Third Country Entity (TCE) that is guaranteed by an European Economic Area (EEA) FC for at least EUR 8 billion of the gross notional amount of OTC derivatives entered into and for an amount of at least 5% of the OTC derivatives exposures of the EEA FC EEA branch of a TCE when trading with EEA branch of another TCE Australian or foreign financial entity with over AUD 100 billion in gross notional outstanding in OTC derivatives on two consecutive quarterly observation dates. Trades must be cleared when two such entities face one another, or when they face a Dodd Frank registered Swap Dealer. Securities houses, investment managers and investment advisors, banks and other registered financial institutions, insurance companies and trust accounts with at least JPY 300 billion in gross notional outstanding in OTC derivatives Local banks and Singaporebased branches of a foreign entity with trades booked in their Singapore based operations and gross notional outstanding derivatives booked in Singapore over SGD 20 billion for each last four calendar quarters Dealer to dealer trades booked in HK by financial services providers incorporated overseas Dealer to dealer trades booked globally by HK incorporated financial services providers Entry threshold USD 20 billion Exit threshold USD 14 billion for 12 consecutive months Exempt Entities Govt. of Canada, jurisdictions of Canada & crown corporations Foreign Govts. Bank of Canada and other central banks Bank for International Settlements (BIS) and International Monetary Fund (IMF) Non-financial entities hedging commercial risk (note, this election is not automatic and must be made) Small depository institutions with under USD 10 billion in assets Sovereigns - Non-US Govts., non-us central banks and multilateral development banks EU, US & Japanese central banks Public bodies of EU states that manage public debt Multilateral development banks Pension funds (until August 15, 2018) Covered bond issuers Central banks Government debt offices Multilateral development bank BIS and similar organizations Shokochukin Bank Development Bank of Japan Shinkin Central Bank Norinchukin Bank Insurers and capital markets services license holders (exempted for Phase 1) Foreign counterparties Public bodies: central banks and Govts., BIS, IMF, World Bank Central banks. Monetary authorities that manage reserves Public bodies that manage public debt/ market stability Global institutions like IMF and BIS Continued 16 RBC CAPITAL MARKETS

17 Comparison of Global Mandatory Clearing Rules Continued Exempt Transactions Canada US EU Australia Japan Singapore Hong Kong Intragroup transactions Transaction resulting from portfolio compression Inter-affiliate transactions meeting the statutory requirements Cooperative transactions meeting the statutory requirements Transactions by non-financial entities to hedge or mitigate commercial risk that meet the statutory requirements Certain intragroup transactions Intragroup transactions Transactions resulting from multilateral portfolio compression cycles Certain intragroup transactions Transactions between counterparties that do not belong to the same CCP Intragroup transactions Deliverable FX forwards and swaps Transactions resulting from portfolio trade compression Product Scope Fixed to float swaps and overnight indexed swaps (OIS) in CAD, USD, EUR and GBP Basis swaps and forward rate agreements (FRA) in USD, EUR and GBP FRA, fixed to float, basis swaps and overnight index swaps EUR, GBP, USD, JPY, AUD, CAD, HKD, MXN, NOK, PLN, SGD, SEK, CHF CDX and itraxx credit default swaps Fixed to float, basis and overnight swaps in G4 and European currencies FRA in EUR, GBP, USD, PLN, NOK and SEK CDX indices FRA, OIS, fixed to-float & basis swaps in AUD & G4 currencies IRS based on JPYLIBOR and EUR-JPY TIBOR Required: SGD and USD fixed to float swaps OIS, fixed-tofloat & basis swaps in HKD & G4 currencies Commencement of Clearing Rule In force August 20, 2018 for affiliates of clearing members with a month-end OTC derivatives gross notionals outstanding over CAD 1 billion (excluding intragroup trades) and local counterparties with month-end OTC derivatives gross notionals outstanding (combined with their local affiliates) over CAD 500 billion (excluding intragroup trades) In force, but additional products and currencies continue to under staggered implementation Cat 1: June 21, 2016 Cat 2: December 21, 2016 Cat 3: June 21, 2019 Cat 4: December 21, 2018 In force Ongoing phased implementation Second half of 2017 (Should be delayed. Consultation conclusion has not been published. Consultation closed on July 31, 2015) In force since July RBC CAPITAL MARKETS

18 II. In scope products for Canadian, US and EU rules Interest Rate Derivatives Class Currency Maturity Floating Rate Indexes Canada CSA US CFTC (Compliance Date) EU ESMA CAD 28D 30Y CDOR Yes Yes (June 5, 2017) No USD 28D 50Y LIBOR Yes Yes Yes EUR 28D 50Y EURIBOR Yes Yes Yes GBP 28D 50Y LIBOR Yes Yes Yes JPY 28D 30Y LIBOR No Yes Yes AUD 28D 30Y BBSW No Yes No IRS Fixed-to-Float IRS Basis Swap Overnight Index Swap (OIS) Forward Rate Agreement (FRA) MXN 28D 21Y TIIE No Yes No PLN 28D 10Y WIBOR No Yes Yes NOK 28D 10Y NIBOR No Yes Yes SEK 28D 15Y STIBOR No Yes Yes HKD 28D 10Y HIBOR No Yes No SGD 28D 10Y SOR-VWAP No CHF 28D 30Y LIBOR No Yes (by October 14, 2018) Yes (by October 14, 2018) USD 28D 50Y LIBOR Yes Yes Yes EUR 28D 50Y EURIBOR Yes Yes Yes GBP 28D 50Y LIBOR Yes Yes Yes JPY 28D 30Y LIBOR No Yes Yes AUD 28D 30Y BBSW No Yes No CAD 7D 2Y CORRA Yes Yes No USD 7D 3Y FedFunds Yes Yes Yes EUR 7D 3Y EONIA Yes Yes Yes GBP 7D 3Y SONIA Yes Yes Yes AUD 7D 2Y AONIA No Yes No USD 3D 3Y LIBOR Yes Yes Yes EUR 3D 3Y EURIBOR Yes Yes Yes GBP 3D 3Y LIBOR Yes Yes Yes JPY 3D 3Y LIBOR No Yes No PLN 3D 2Y WIBOR No Yes Yes NOK 3D 2Y NIBOR No Yes Yes SEK 3D 3Y STIBOR No Yes Yes No No Continued 18 RBC CAPITAL MARKETS

19 In scope products for Canadian, US and EU rules continued Credit Derivatives Class Indices Region Tenor Series Tranched Reference Entities Canada (CSA) US (CFTC) EU (ESMA) CDX.NA.IG North America 3Y 15 onwards No Corporate No Yes No CDX.NA.IG North America 5Y 11 onwards No Corporate No Yes No CDX.NA.IG North America 7Y 8 onwards No Corporate No Yes No CDX.NA.IG North America 10Y 8 onwards No Corporate No Yes No Index Credit Default Swaps (CDS) CDX.NA.HY North America 5Y 11 onwards No Corporate No Yes No itraxxeurope Europe 5Y 10 onwards No Corporate No Yes No itraxxeurope Europe 5Y 17 onwards No Index No No Yes itraxxeurope Europe 10Y 7 onwards No Corporate No Yes No itraxxeuropecrossover Europe 5Y 10 onwards No Corporate No No Yes itraxxeuropecrossover Europe 5Y 17 onwards No Index No Yes No itraxxeuropehivol Europe 5Y 10 onwards No Corporate No Yes No APPENDIX E: TRADE REPORTING AND PUBLIC DISSEMINATION OF TRADE INFORMATION I. Asset Classes Subject to Public Dissemination of Trade Information Asset Class Interest Rate Credit Equity Underlying Asset Identifier CAD-BA-CDOR, USD-LIBOR-BBA, EUR-EURIBOR-Reuters, GBP-LIBOR-BBA All Indices All Indices II. Rounding Methodololgy for Notional Amounts Reported Notional Amount (Leg 1 or Leg 2) Rounded Notional Amount < 1,000 Round to nearest 5 1,000, <10,000 Round to nearest ,000, <100,000 Round to nearest 1, ,000, <1 million Round to nearest 10,000 1 million, <10 million Round to nearest 100, million, <50 million Round to nearest 1 million 50 million, <100 million Round to nearest 10 million 100 million, <500 million Round to nearest 50 million 500 million, <1 billion Round to nearest 100 million 1 billion, <100 billion Round to nearest 500 million >100 billion Round to nearest 50 billion 19 RBC CAPITAL MARKETS