OSFI Issues Draft Guideline for Derivatives Sound Practices for Federally Regulated Private Pension Plans

On July 31, 2017, the Office of the Superintendent of Financial Institutions Canada (OSFI) published for comment a new draft guideline, titled: Derivatives Sound Practices for Federally Regulated Private Pension Plans (Draft Guideline). According to OSFI, the new Draft Guideline is intended to outline factors that OSFI expects administrators of federally regulated pension plans to consider as they develop and apply policies and procedures for risk management of derivative activities.  

As expected, the Draft Guideline contains a number of new topics and commentary compared to the 1997 guidelines published by OSFI. Topics discussed in the new Draft Guideline include:

  • Explicit recognition of the use and prevalence of exchange-traded and over-the-counter derivatives (OTC Derivatives) by pension plans, including for purposes of risk mitigation
  • The importance for plan administrators to consider independent valuation inputs rather than relying only on the counterparty for valuation of the derivative
  • The recommendation that before entering into a hedging derivative, a plan administrator should assess the strategy’s effectiveness and develop processes to monitor the hedging strategy against potential sources of basis risk
  • Suggestions that a plan administrator should conduct a “comprehensive credit assessment” of each of its proposed counterparties
  • A new discussion of operational risk including a requirement that the plan administrator be aware that the  counterparty (and potentially also the pension plan) may be subject to specific statutory reporting requirements (from securities or other regulators) for registering, central clearing and trade reporting in OTC Derivatives (for more information, please see our recent Structured Finance & Derivatives Blakes Bulletins)
  • OSFI’s expectations for indirect investment by pension plans in derivatives through pooled, investment and hedge funds
  • Suggestions that a plan administrator should conduct stress testing of the pension plan’s derivative transactions under a variety of market conditions and scenarios in order to make the administrator aware of potential losses that the plan could be exposed to as a result of its derivative transactions.

OSFI has asked for comments on the Draft Guideline by September 29, 2017.

For further information, please contact a member of our Pensions, Benefits & Executive Compensation group.

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