Canadian Derivatives Clearing Corporation

Key Takeaways

• CDCC clears exchange-traded derivatives and some OTC products in Canada.
• Founded in 1977, CDCC is wholly owned by the Montreal Exchange.
• CDCC's "Converge" service offers clearing for off-exchange customized transactions.
• CDCC uses TIMS and SPAN for margining methodologies.
• Over 30 large financial institutions are CDCC members.

What Is the Canadian Derivatives Clearing Corporation (CDCC)?

The Canadian Derivatives Clearing Corporation (CDCC) serves as Canada's main clearinghouse for exchange-traded derivatives, including options and futures. It also clears a growing range of over-the-counter (OTC) financial instruments, including fixed income and foreign exchange products. The Montreal Exchange owns CDCC, which operates under the Bourse de Montreal, Inc.1

How the Canadian Derivatives Clearing Corporation (CDCC) Operates

The Canadian Derivatives Clearing Corporation (CDCC), initially called the Trans Canada Options (TCO), was established in 1977 through the merger of the Montreal and Toronto options clearinghouses. TCO changed its name to Canadian Derivatives Clearing Corporation in 1996.1

By 2000, the CDCC became entirely owned by the Montreal Exchange. Eight years later, the merger of the Montreal Exchange and the TSX Group changed the ownership of the CDCC to the TSX Group. Under this leadership, the Canadian Derivatives Clearing Corporation (CDCC) would expand its operations to include the clearing of fixed income transactions in 2012.

The CDCC states that it is the only integrated central clearing counterparty in North America that clears and settles not only futures and options but contracts for options on futures as well.2 The company has over 35 years of being Canada's central clearing counterparty and guarantor of derivative products that are exchange-rated. Furthermore, the CDCC includes more than 30 clearing members.

The members include large institutions, such as the Bank of Montreal, BNP Paribas, Citibank Canada, Goldman Sachs Canada, J.P. Morgan Securities Canada, and Scotia Capital. Membership requires an extensive review process that includes a review of the financial health of the applicants.3

There are two dominant clearinghouses in the United States, the New York Stock Exchange (NYSE) and the Nasdaq. In addition to the CDCC, Canada also has the CDS Clearing and Depository Services Inc (CDS Clearing), The CLS Bank, and the LCH Clearnet's SwapClear service.4

Activities of the Canadian Derivatives Clearing Corporation (CDCC)

A clearinghouse acts to guarantee transactions that take place between buyers and sellers. The most frequent association of a clearinghouse is with the futures market. All trades must transfer through a clearinghouse at the end of every trading session. Members are required to deposit enough funds to cover the member’s balance.

The purpose of a clearinghouse is to stabilize the market and expedite efficiencies. This is especially necessary when dealing with the futures market as the transactions are complex and require a stable intermediary.

The CDCC provides this by covering equities, fixed income, and currency derivatives traded on the Montreal exchange, providing its members with clearing services on a large scale product suite. It also supports OTC options on equities and exchange-traded funds (ETFs). In addition, it intends to offer clearing services for repurchase agreements (repos).

CDCC also offers a service known as "Converge," which provides high-level financial risk management for complex and customized financial securities. These are for transactions that do not occur on an exchange. This service has been offered since 2006 for equity and fixed income products.5

Margining Systems Used by the Canadian Derivatives Clearing Corporation (CDCC)

CDCC utilizes two risk-based margining methodologies. Its first system was established in 1990, the Theoretical Intermarket Margin System (TIMS). This system was developed by the Options Clearing Corporation (OCC).

In 1997, CDCC decided to upgrade its margining system and began using the Standard Portfolio Analysis of Risk (SPAN), which was created by the Chicago Mercantile Exchange (CME). SPAN is commonly used and approved worldwide and allows for a value at risk (VaR) assessment on an overall portfolio basis. SPAN was developed in 1988.6