The Pension and Benefits Law Section called once again for a harmonized pension regulatory system in its October comment on the Office of the Superintendent of Financial Institution’s revised draft derivatives guideline for federally regulated pension plans.
Derivatives include an assortment of financial or commodity contracts, including forwards, futures, swaps and options. Used prudently, derivatives can be used by pension plan administrators to implement risk management strategies that can reduce risks associated with a range of financial variables like exchange rates, interest rates, market indices and commodity prices.
The Section says harmonization is key to facilitating an effective and efficient pension regulatory system.
“In the interests of harmonization, the CBA Section is concerned with any mandated differences and benefit rules that vary by jurisdiction,” the Section says in a letter to the OSFI’s senior pension analyst. “Many repurchase and securities lending arrangements are similar in structure and economic result to many of the financial instruments addressed by the draft guideline. In light of this, the CBA Section suggests that OSFI consider what application, if any, the principles articulated in the draft guideline may have with respect to those arrangements.”
The Section also made a couple of specific recommendations on the draft guideline. It says a proposed requirement for independent valuation inputs for derivatives would “unnecessarily increase transaction costs for pension plans,” and recommends that the wording be softened – suggesting that administrators “consider” seeking independent valuation inputs, instead of requiring them to.
It also suggests that the OSFI clarify what it means by independent. “We recommend that OSFI clarify that an independent valuation could be performed by a pension plan administrator where the administrator has the appropriate expertise, in order to minimize unnecessary transaction costs.”
Other recommendations were:
- Remove the reference in subsection 7.1 to needing a legal opinion on payment netting, since close-out netting is the relevant concern
Remove the word “reporting” from the second sentence of the second paragraph on Page 12, Section 91.1, Regulatory Compliance, so that the sentence reads “… may be subject to specific regulatory requirements for registering, central clearing, risk mitigation and trade reporting if they transact in OTC derivatives.”