A little more notice please! Amendments to Ontario PPSA debtor location rules effective December 31 may require additional registrations

Margaret Grottenthaler and Kelly Niebergall -

It was recently announced that amendments to the Ontario Personal Property Security Act (the Ontario PPSA) that were passed way back in 2006 will become effective on December 31, 2015. This matters to the structured finance community because these amendments change the test for determining the debtor’s “location”. For participants in derivatives, futures, securities lending and repo markets, the debtor’s location is relevant to cash collateral and security interests in contractual and other intangible rights (such as futures contracts and rights against clearing houses). As outlined below, the changes mean that creditors who have taken steps to perfect by registration in the jurisdiction of the debtor’s chief executive office will have to consider whether they should file a financing statement in an additional jurisdiction if the debtor’s registered office turns out to be in a different jurisdiction. Also, where new security is taken, filing in both jurisdictions may be required or at least prudent.

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Investment funds lawyers co-author Canada chapter in asset management publication

Stikeman Elliott lawyers Alix d’Anglejan-Chatillon and Jeffrey Elliott have contributed the chapter on Canada The Asset Management Review. This publication provides a business-focused overview and analysis of regulation and market developments in asset management across 33 jurisdictions worldwide. This article was first published in The Asset Management Review, 4th edition (published in September 2015 – editor Paul Dickson) by Law Business Research Ltd., London.  www.lbresearch.com

CFTC recognizes Montréal Exchange and Ice Futures Canada as Foreign Boards of Trade

Alix d’Anglejan-Chatillon

On August 28, Montréal Exchange Inc. (MX), the leading Canadian derivatives exchange, and ICE Futures Canada, Inc. (ICEFC), Canada’s largest agricultural derivatives platform, received Orders of Registration from the U.S. Commodity Futures Trading Commission (CFTC) as Foreign Boards of Trade (FBOTs).  The FBOT approvals permit MX and ICEFC to provide their identified members or other participants located in the U.S. with direct access to their electronic order entry and trade matching systems.

MX and ICEFC previously provided direct access on the basis of no-action letters issued by CFTC staff.  The no-action letters were automatically withdrawn upon the issuance by the CFTC of the FBOT orders.  MX will offer direct access for futures contracts on interest rates and certain broad-based security indices, as well as options on futures contracts based on the Canadian overnight repo rate average (CORRA) and ten-year Government of Canada bonds.  ICEFC will offer direct access for futures and options contracts on milling wheat, canola, durum wheat, and barley.

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Quebec Derivatives Blanket Exemption - Revocation postponed by nine months

Alix d’Anglejan-Chatillon and Ken Ottenbreit - 

The Autorité des marchés financiers (AMF), Quebec's financial services regulator, published Decision No. 2015-PDG-0132 (the Extension Decision) yesterday (August 27, 2015).  The Extension Decision (released in French only) postpones the effective date of the revocation of the so-called blanket derivatives exemption under the Quebec Derivatives Act (QDA) (the Blanket Decision) by nine months, from September 5, 2015 to June 5, 2016. 

The Extension Decision will be particularly welcome news for foreign futures commission merchants (FCMs) which have been trading foreign and MX listed futures for Quebec institutional clients on the basis of various exemptions for a number of years and faced the prospect of having to shut down that business by September 4th.    Buy-side institutional clients in the Quebec market will also have more breathing room to adapt their futures trading arrangements in light of decisions made by foreign FCMs to seek derivatives dealer registration in Quebec or discretionary exemptive relief, or to discontinue their current futures trading business in Quebec.

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AMF revokes Quebec derivatives exemption and issues limited guidance on registration matters - market participants advised to take urgent action

Alix d’Anglejan-Chatillon -

The Autorité des marchés financiers (AMF), Quebec's financial services regulator, has issued a notice to firms which can no longer rely on the so-called blanket derivatives exemption under the Quebec Derivatives Act (QDA) that it expects applications for derivatives dealer registration and SRO membership to be submitted by September 4, 2015 i.e., prior to revocation effective September 5 of the AMF’s blanket derivatives exemption.  

As previously noted, Canadian and foreign market participants (including U.S. and other non-Canadian FCMs) which have relied on this exemption should be taking urgent action to review their current derivatives markets activities in Quebec and determine whether to register under the QDA, whether any other statutory relief may be available, whether there may be a basis to apply for focused discretionary relief under the QDA and whether any current client arrangements with Quebec counterparties should be discontinued by the September 5, 2015 deadline.  

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Cash collateral amendments for Ontario recommended by expert panel

Margaret Grottenthaler -

As we noted last week, an expert panel recommended important reforms to Ontario’s Personal Property Security Act (PPSA) as part of a broader study into modernizing Ontario business law.  The panel proposed amendments to the PPSA permit cash as collateral to be perfected by control as opposed to registration.  The panel further recommended allowing cash, when perfected by control, to have priority over competing security interests.  These proposed changes are intended to harmonize the Ontario PPSA with Revised Article 9 of the Uniform Commercial Code and provisions of the Civil Code of Quebec governing security interests.  

As our readers know we have been strong advocates for these changes.  They would significantly facilitate the use of cash as collateral and be of significant benefit to businesses that seek to use cash collateral to finance their operations, particularly their financial market participation, such as derivatives transactions.  Priority would not depend on registration but on control. Such amendments could therefore potentially reduce transaction costs and allow other secured creditors to have nearly complete assurance that a security interest in cash perfected by control would have priority over every other security interest that has not been perfected by control.  

Hopefully the support of the expert panel will convince the government to introduce these much needed amendments to the PPSA, something that the government promised to do in earlier budgets. For further information, please consult the report of the expert panel.

Modernizing Ontario's Business Law: expert panel releases its "Wish List"

Andrew S. Cunningham and Brian Lynch - 

The following post originally appeared on our M&A blog. The structured finance community will be particularly interested in the part about possible changes to the cash collateral rules under the Ontario PPSA. We plan to publish a post dealing more specifically with the PPSA issues in the coming days.

On February 15, 2015, Ontario’s Minister of Government and Consumer Services asked a 13‑member panel of legal practitioners and academics to survey the province’s business law landscape and provide recommendations on reforming laws to modernize the province’s business environment. In June, 2015, the panel submitted a comprehensive report with 16 recommendations for legislative reform that would promote the following key objectives:

  • Making Ontario a leading jurisdiction for business;
  • Updating legislation dealing with commercial activity, including the PPSA; and
  • Creating an environment with more certainty and efficiency to support market activity and small business growth.
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Québec counterparties will be able to grant pledges over cash collateral starting January 1, 2016

Sterling Dietze

Our post of December 9, 2014 introduced the proposed modifications to the Civil Code of Québec (Civil Code) in Bill 28 to permit, among other things, pledges over cash collateral. The proposed modifications were adopted in final form on April 21, 2015 and will come into force on January 1, 2016.

There were some important last-minute modifications to Bill 28 which clarify a number of rules:

  • the consent required for a Québec counterparty to grant a pledge to a creditor that is also the debtor of the monetary claim need not be in writing;
  • Control agreements also do not need to be in writing;
  • A secured party will be able to obtain control of a financial account by becoming the account holder and this will give it priority over other secured creditors that may have control;
  • the realization regime for these pledges will not require registration at the Québec central registry in any practical realization scenario; and
  • the applicable Quebec conflict of laws rules have been clarified to harmonize them with those applicable under Article 9 of the Uniform Commercial Code (United States) (UCC).
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OSC, AMF and MSC propose relief to end users from trade reporting for certain inter-affiliate trades

The Ontario Securities Commission, the Autorité des marchés financiers and the Manitoba Securities Commission have announced that “end users” will not be required to comply with derivatives trade reporting requirements in respect of trades between an end user and an affiliate in certain circumstances. An “end user” is essentially a reporting counterparty that is not a derivatives dealer, a clearing agency, or, in Quebec and Manitoba, a Canadian financial institution.

End users are subject to the trade reporting obligation as of June 30, 2015 under local trade reporting rules adopted in these three provinces. However, the AMF and the MSC have granted temporary relief for end users in respect of certain inter-affiliate trades pending codification of this relief in their respective local rules. The OSC has indicated in its staff notice that it intends to propose amendments to the local Ontario trade reporting rule to provide similar relief.

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"No sale": B.C. court holds that a purported acquisition of scrap metal was in substance a financing deal rather than a true sale

Andrew Cunningham -

A recent British Columbia Supreme Court case took a fresh look at the old question of how to tell a true sale from a financing or loan transaction. The ruling in Coutinho & Ferrostaal GmbH v. Tracomex (Canada) Ltd. is a welcome addition to the relatively sparse body of case law on this topic, as it reaffirms and applies a number of the principles set out in the 2003 Ontario decision in Metropolitan Toronto Police Widows and Orphans Fund v. BC Tel Communications Inc. (Widows and Orphans).

The facts of Coutinho are too complicated (and, truthfully, too boring) to recount in detail. Suffice it to say that various players in the scrap metal industry were interested in a stockpile of old railroad rails located just outside Vancouver. The dispute was ultimately about who owned the rails after a series of transactions had taken place among parties of various nationalities who, by the end, all seemed to be accusing one other of various forms of duplicity. The court eventually (and wisely) decided the ownership issue in favour of the plaintiff, Coutinho & Ferrostaal (C&F), which appears to have been the most innocent of the dramatis personae.

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