I guess I'd better hurry. Thank you very much, Mr. Chairman, and honourable members of the committee. The Bank of Canada is very pleased to appear before the committee today. What we've been asked to talk about to assist the committee are the amendments in part 4, division 3 of Bill C-45. These are the amendments to a piece of legislation that I'm sure keeps you up late at night called the Payment Clearing and Settlement Act .
What I'd like to do is deliver a fairly brief opening statement. It is a fairly technical topic. I tried to be as clear as I could. Then I'd be pleased to try to answer your questions about these particular amendments.
I will begin in French.
At the 2009 G20 Summit in Pittsburgh, the leaders agreed that standardized over-the-counter derivatives contracts should be cleared through central counterparty clearing systems, by the end of 2012.
A central counterparty is a financial market infrastructure that stands between buyers and sellers in financial transactions, ensuring that obligations will be met on all contracts cleared through the CCP.
By managing and mitigating counterparty credit risk, central counterparties have the potential to reduce systemic risk, both globally and in Canada. They reduce the potential for financial shocks to be transmitted through the financial system and enable markets to remain continuously open, even in times of stress.
About a month ago, Canadian authorities reconfirmed their G20 commitment to central clearing and indicated that Canadian participants in the derivatives market can respect this commitment by clearing derivatives contracts through the global, cross-border clearing systems that are currently being developed in the United Kingdom and the United States.
Regardless of whether derivatives are cleared through a central counterparty in Canada or abroad, Canadian laws will be applied to determine the rights and obligations of Canadian participants and their customers. It is therefore important for financial stability in Canada that the transfers of assets among central counterparties, Canadian participants and their customers for the clearing and settlement of derivatives transactions be protected from possible legal challenges in the event that a Canadian participant were to become insolvent.
The main statute in Canada for protecting clearing and settlement systems from legal challenges in the event of the failure of a participant is the act that we're dealing with here, the Payment Clearing and Settlement Act, or as we call it, the PCSA. The PCSA gives the Bank of Canada responsibility for the regulatory oversight of clearing systems that could pose systemic risk. The PCSA also provides a number of important legal protections for these systems. In particular, it ensures that the rights of a clearing house to be paid, to settle transactions and to deal with collateral deposited by participants will not be stayed or unwound under the insolvency statutes if a participant defaults.
The purpose of these protections is to ensure that a clearing house will be able to exercise its legal rights to settle the system within a reasonable timeframe following a default and that it will have sufficient rights in the assets deposited by participants to ensure that the clearing house itself is not brought down by a failure of one or more participants, thereby propagating systemic risk.