What is the Canadian Derivatives Clearing Corporation (CDCC)?
The Canadian Derivatives Clearing Corporation (CDCC) is the central clearing counterparty for exchange-traded derivatives, such as options and futures, in Canada. The CDCC also acts as clearing house for an increasing range of over the counter (OTC) financial instruments, including fixed income securities and foreign currency securities. CDCC is a wholly owned subsidiary of the Montreal Exchange and operates as a subsidiary of Montreal Exchange, Inc.
Key points to remember
- The Canadian Derivatives Clearing Corporation (CDCC) is the leading clearinghouse for exchange-traded derivatives in Canada.
- The Montreal Exchange wholly owns CDCC and CDCC is a subsidiary of the Montreal Exchange.
- CDCC was established in 1977 and over its lifetime has expanded to include fixed income, equities and currencies.
- CDCC has more than 30 clearing members, mainly large financial institutions.
- A specialized service offered by CDCC is “Converge”, which provides clearing services for off-exchange custom trades.
- CDCC uses two margining methodologies: Theoretical Intermarket Margin System (TIMS) and Standard Risk Portfolio Analysis (SPAN).
Understanding the Canadian Derivatives Clearing Corporation (CDCC)
The Canadian Derivatives Clearing Corporation (CDCC), originally called Trans Canada Options (TCO), was created in 1977 by the merger of the Montreal and Toronto companies. options clearinghouses. TCO changed its name to Canadian Derivatives Clearing Corporation in 1996.
In 2000, CDCC became the exclusive property of the Montreal Exchange. Eight years later, the merger of the Montreal Exchange and TSX Group changed the ownership of CDCC to TSX Group. Under this leadership, the Canadian Derivatives Clearing Corporation (CDCC) would expand its activities to include the clearing of fixed income transactions in 2012.
CDCC says it is the only integrated central clearing counterparty in North America that clears and settles not only futures contracts and options, but contracts for futures options as well. For more than 35 years, the company has been the central clearing counterparty and guarantor of exchange-traded derivatives in Canada. In addition, CDCC has over 30 clearing members.
Members include major institutions such as Bank of Montreal, BNP Paribas, Citibank Canada, Goldman Sachs Canada, JP Morgan Securities Canada and Scotia Capital. Membership requires a thorough review process that includes a review of the financial health applicants.
There are two dominant clearinghouses in the United States, the New York Stock Exchange (NYSE) and the Nasdaq. In addition to CDCC, Canada also has CDS Clearing and Depository Services Inc (CDS Clearing), CLS Bank and LCH Clearnet’s SwapClear service.
Activities of the Canadian Derivatives Clearing Corporation (CDCC)
A clearing house acts to guarantee the transactions that take place between buyers and sellers. The most common association of a clearing house is with the futures market. All trades must go through a clearing house at the end of each trading session. Members are required to deposit sufficient funds to cover the member’s balance.
The purpose of a clearinghouse is to stabilize the market and accelerate efficiencies. This is especially necessary when dealing with the futures market, as the transactions are complex and require a stable intermediary.
CDCC provides this by covering equities, fixed income and currencies derivatives traded on the Montreal Exchange, offering its members clearing services on a wide range of products. It also supports OTC options on stocks and exchange traded funds (AND F). In addition, it intends to offer clearing services for repurchase agreements (rest).
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 bond products.
Margin on Canadian Derivatives Clearing Corporation (CDCC)
CDCC uses two risk-based margin calculation methods. Its first system was created in 1990, the Theoretical Intermarket Margin System (TIMS). This system was developed by the Options Clearing Company (OCC).
In 1997, CDCC decided to upgrade its margining system and started using the Standard Risk Portfolio Analysis (SPAN), which was created by the Chicago Trade Exchange (EMC). SPAN is commonly used and approved worldwide and provides value at risk (VaR) based on an overall portfolio. SPAN was developed in 1988.
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