What Is the Canadian Derivatives Clearing Corporation (CDCC)?

The Canadian Derivatives Clearing Corporation (CDCC) is the central clearing counterparty for exchange traded derivative products, such as options and futures, in Canada. The CDCC also acts as the clearinghouse for a growing range of over-the-counter (OTC) financial instruments including fixed income and foreign exchange securities. CDCC is a wholly-owned subsidiary of the Montreal Exchange and operates as a subsidiary of Bourse de Montreal, Inc.

Key Takeaways

  • The Canadian Derivatives Clearing Corporation (CDCC) is the main clearinghouse for exchange traded derivative products in Canada.
  • The Montreal Exchange wholly owns CDCC and CDCC operates as a subsidiary of Bourse de Montreal.
  • The CDCC was established in 1977 and over its lifetime has expanded to include fixed income, equities, and currencies.
  • The CDCC has over 30 clearing members, mostly large financial institutions.
  • A specialty service that the CDCC offers is "Converge," which provides clearing services for off-exchange, customized transactions.
  • The CDCC utilizes two margining methodologies: the Theoretical Intermarket Margin System (TIMS) and the Standard Portfolio Analysis of Risk (SPAN).

Understanding the Canadian Derivatives Clearing Corporation (CDCC)

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. 

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. 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.

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.

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.

Margining on 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.