Yukon's Securities Transfer Act now in force

Yukon recently proclaimed the Securities Transfer Act and related amendments to the Personal Property Security Act (related to security interests in investment property) into force effective May 1, 2015 (Yukon Gazette, February 15, 2015). This leaves PEI as the only province or territory without a Securities Transfer Act or a perfection by control regime for investment property.

Quebec AMF to revoke derivatives blanket exemption decision effective September 5, 2015

Alix d'Anglejan-Chatillon -

The  Autorité des marchés financiers (AMF), Quebec's financial services regulator, issued an important decision yesterday which provides for the revocation effective September 5, 2015 of Decision No. 2009-PDG-0007 General Decision Respecting the Exemption from the Application of Sections 54, 56 and the First Paragraph of Section 82 of the Derivatives Act (the Blanket Decision).  The decision can be found beginning on page 413 of the April 30, 2015 Bulletin.

The AMF had issued the Blanket Decision on January 22, 2009 in conjunction with the enactment of the Quebec Derivatives Act (QDA) to provide transitional relief for transactions and other activities in relation to certain specified derivatives, subject to certain conditions. Canadian and foreign market participants which have relied on this exemption should review their current derivatives markets activities in Quebec and determine whether any other statutory relief may be available, whether there may be a basis to apply for focused discretionary relief under the QDA or whether any current client arrangements with Quebec counterparties should be discontinued by the September 5, 2015 deadline.

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Contracting with Corporate Class Funds (or a Sofa)

Margaret Grottenthaler -

Can your sofa enter into a contract? Of course not! Can a class of shares enter into a contract?  Of course not! Both your sofa and the shares are property, not persons. Only an entity with legal personality can enter into contracts. However, it isn’t unusual in the context of ISDA Agreements, for example, for fund managers to name a particular corporate class of shares as the counterparty. At times there isn’t even a clue in the agreement as to the name of the corporation that has issued the shares.

But if you are contracting with such an entity, make no mistake – your counterparty is the corporate entity. Practically speaking these fund structures work by allocating assets and liabilities on a class by class basis, with liabilities being allocated by including limited recourse provisions in material contracts. In other words, your counterparty is the corporation, but you (and others contracting with the corporation with respect to that fund) agree to limit recourse to the assets allocated to a particular class of shares. It is these limited recourse provisions that protect the shareholders of one class and creditors contracting with respect to that class from being exposed to the liabilities of the corporation contracted with respect to another class. Without them, that siloing does not exist.

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Yukon joins Cooperative Capital Markets Regulatory System

The Canadian Department of Finance announced yesterday that Yukon has now joined the Cooperative Capital Markets Regulatory System. The project now includes British Columbia, Ontario, Saskatchewan, New Brunswick, and Prince Edward Island, Yukon and the federal government.

The Department of Finance also announced the members of the nominating committee that will recommend candidates for the initial board of directors to the Capital Markets Regulatory Authority. Participating jurisdictions also intend to release updated consultation draft federal, provincial and territorial capital markets legislation and draft initial regulations this summer.

For more information on the proposed regime, see our posts on the infrastructure of the proposed new regime, the proposed provincial acts, and the effects of the proposals on derivatives regulation.

The Investment Funds Practitioner published for April 2015

The Investment Funds and Structured Products Branch of the Ontario Securities Commission today released the April 2015 issue of The Investment Funds Practitioner, which provides an overview of recent issues arising from applications for discretionary relief, prospectuses and continuous disclosure documents filed by investment funds.

In respect of prospectuses, the Practitioner discusses concerns with respect to dual class structures of flow-through limited partnerships. The Practitioner also discloses OSC Staff's expectation that redemptions by ETFs that offer periodic redemptions of their securities at a price determined with reference to the closing market price of those securities be capped at NAV and that disclosure regarding market price redemptions include a statement to that effect. Dealing with mutual funds specifically, concerns include setting the payment of distributions in the form of reinvested units or shares as the default option if securityholders do not specifically request distributions in cash. Further, the Practitioner discusses when additional prospectus disclosure may be requested of the offering expenses of split share companies, and concerns with disclosure in closed-end fund prospectuses that suggest the closed-end fund would be permitted to do certain activities that are now contrary to the amended NI 81-102.

The Practitioner also discusses issues with past performance presentation in Fund Facts and public inquiries in regards to the rehypothecation of collateral for OTC derivatives.

IIROC proposes adjusting margin requirements for agency lending agreements

The Investment Industry Regulatory Organization of Canada yesterday proposed amendments to Dealer Member Form 1 intended to address concerns that current rules do not set out specific margin requirements for agency cash and security borrowing and lending arrangements, as well as the fact that current rules do not have the same margin requirements for arrangements with acceptable counterparties versus regulated entity counterparties.

The concerns are especially relevant considering the recent trend involving dealers entering into borrowing and lending arrangements with custodians that act as agents for counterparties. According to IIROC, the risk of such agreements is equivalent to comparable "principal" arrangements. However, since Dealer Member Form 1 does not cover these types of agency agreements, dealers are currently required to provide additional margin in these cases. 

To address these concerns, the amendments are designed to ensure that agency arrangements are treated for margin purposes in the same way as equivalent principal arrangements between dealers and custodians. As such, the counterparty credit risk classification of the custodian would determine the level of margin required. Custodians that are active in the security borrowing and lending business are typically financial institutions that meet the definition of "acceptable institutions" and are considered low credit risk clients.

Proposals to amend the margin requirements were first published last year, and yesterday's release takes into account comments received from stakeholders. IIROC is accepting comments on its revised proposal until May 27, 2015. For more information, see IIROC Notice 15-0053.

CSA adopt amendments to short-term debt and short-term securitized products prospectus exemptions

Last week, the Canadian Securities Administrators released amendments to prospectus exemption rules relating to the short-term debt and short-term securitized products prospectus exemptions.

Ultimately the changes will, among other things, (i) change the requirements that short-term debt securities must satisfy in order to be distributed under the short-term debt prospectus exemption; (ii) make the short-term debt prospectus exemption unavailable for securitized products such as asset-backed commercial paper; and (iii) introduce a new short-term securitized products prospectus exemption. The new requirements for reliance on the amended short-term debt exemption include the imposition of a new “modified split rating condition”, which will require that, in addition to satisfying the rating threshold condition (that the short-term debt has at least one credit rating at or above the prescribed threshold), the short-term debt not have any rating that is below those prescribed.

As we've previously discussed, these focused changes in respect of short-term securitized products are a retreat from the more comprehensive proposals to establish a new framework for the regulation of securitized products proposed in 2011

Assuming Ministerial approvals, the changes will come into force on May 5, 2015. Notably, the CSA has also announced changes to the accredited investor and minimum amount investment prospectus exemptions. 

CSA propose rules for mandatory derivatives clearing

Margaret GrottenthalerAlix d’Anglejan-Chatillon and Keith Chatwin -

The Canadian Securities Administrators yesterday released proposed rules setting out mandatory requirements for central counterparty clearing of certain standardized over-the-counter derivatives transactions. The rule is in the form of a National Instrument, so harmonization across Canadian jurisdictions should be better than it is under the trade reporting rules. In addition to setting out clearing requirements, proposed National Instrument 94-101 also contains rules related to how regulators will determine which derivatives are subject to mandatory clearing. Ultimately, the proposal is intended to enhance market transparency and mitigate systemic risk.

As we previously discussed, the CSA previously proposed model rules in regards to central counterparty clearing in December 2013. We took a closer look at those rules in January 2014. The proposed NI 94-101 is based on the draft model provincial rule, with revisions based on comments received from stakeholders.

The CSA are accepting comments on the proposal until May 13, 2015.

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Proposed TSX Company Manual amendments create tailored listing regime for non-corporate issuers

Darin Renton and Junaid Subhan - 

On January 15, 2015, the Toronto Stock Exchange (TSX) published for comment proposed public interest amendments to the TSX Company Manual (the Manual) in respect of Non-Corporate Issuers, comprising Exchange Traded Products (ETPs), Closed-end Funds and Structured Products, by introducing a new Part XI to the Manual and amending Part I of the Manual (the Amendments). The proposed Amendments relate to the listing of and transactions undertaken by Non-Corporate Issuers.

Many of the Amendments codify existing TSX practice. 

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CSA publish consultation paper on OTC derivatives trading facilities

The Canadian Securities Administrators yesterday released a consultation paper in which they proposed a framework for the regulation of over-the-counter derivatives trading facilities in Canada. 

Ultimately, the paper sets out the CSA Derivative Committee's recommendations in respect of such things as: (i) a definition of derivatives trading facilities; (ii) the regulatory framework for such facilities; (iii) organizational requirements, which would be comparable to the extent appropriate to those established for marketplaces under NI 21-101; (iv) execution methods; (v) pre-trade and post-trade transparency; and (vi) determining whether certain OTC derivatives should be mandated to trade exclusively on an authorized derivatives trading facility.

The consultation paper is the seventh in a series building on the high-level proposals found in Consultation Paper 91-401 released in November 2010.

The CSA invite comments on the paper, including in respect of a series of specific questions, until March 30, 2015. For more information, see Consultation Paper 92-401.