Regulations under proposed provincial Capital Markets Act to be published next spring

On December 5th, Canadian regulators participating in the Cooperative Capital Markets Regulatory System provided an update in respect of the preparation of initial regulations to be enacted under the proposed provincial Capital Markets Act (PCMA). Specifically, the participating regulators expect to published the draft regulations for comment in the early spring of 2015. Draft regulations had initially been expected this month.

According to the regulators, the proposed regulations will be based on existing provincial rules, including harmonized national instruments, and will include proposed changes to current rules only as needed to eliminate differences in requirements and fit them under the PCMA.

Proposed regulations to be adopted under the federal Capital Markets Stability Act will be published separately.

Quebec is first province to propose cash collateral regime

Sterling Dietze  -

As previously reported in our post of November 28, 2014, the Quebec Minister of Finance presented Bill 28 to the National Assembly on November 26, 2014. The proposed legislation includes provisions in respect of cash collateral, and would make Quebec the first Canadian province to propose legislative modifications in order to facilitate cash collateral. The purpose of this post is to provide some background as to the necessity of these new provisions as well as an overview of the specific rules before proceeding to give examples of application.

Background

Historically, it has been a challenge for Canadian entities to offer a first priority security interest on cash to their counterparties. By contrast, in the United States, a debtor may grant a first priority security interest over cash in a deposit account by way of control pursuant to the provisions of Article 9 of the Uniform Commercial Code. The same is not currently the case in Canada for cash not in a securities account. If a secured party is granted a security interest in cash, the traditional view is that valid security under the laws of the jurisdiction of the grantor’s location needs to be obtained, the security needs to be perfected by registration, a search of the relevant register needs to be undertaken and estoppels, subordinations or waivers from competing or prior ranking creditors need to be obtained. This may be a costly and time-consuming exercise and ultimately may not be successful.

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Canadian regulators propose new rules for clearing agencies

On November 27, the CSA published for comment proposed harmonized rules respecting clearing agencies that would set out certain requirements in relation to the application process for seeking recognition as a clearing agency (or an exemption from the recognition requirement), as well as the ongoing requirements for recognized clearing agencies that act as central counterparties, central securities depositories or securities settlement systems.

The requirements under proposed National Instrument 24-102 Clearing Agency Requirements and its Companion Policy are generally based on the Principles for Financial Market Infrastructures (PFMI) developed by the Committee on Payment and Settlement Systems (CPSS) of the Bank for International Settlements and the Board of the International Organization of Securities Commissions (IOSCO). The PFMI set out in the April 2012 CPSS/IOSCO consultative report are considered to be minimum international standards for payment, clearing and settlement systems which must be implemented globally to strengthen core financial infrastructures and markets (including derivatives markets) and critical market infrastructures, and to limit systemic risks. 

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Quebec proposes Cash Collateral Provisions and modifications to Security Agent Provision

Sterling Dietze -  

On November 26, 2014, the Quebec Minister of Finance presented Bill 28 to the National Assembly. The proposed legislation includes provisions in respect of cash collateral as well as modifications to the provision for security in favour of a security agent. Once the bill is adopted, the cash collateral provisions are proposed to come into effect on a later date determined by the Quebec government. The basic conceptual building block for cash collateral is the notion of control similar to that applicable to granting a first priority security over security entitlements. The provisions also compare favorably in important respects to the security-interest regime applicable to deposit accounts under Article 9 of the Uniform Commercial Code. We will be posting, in the next little while, further discussion in respect of the cash collateral provisions.

CFTC extends swap reporting relief applicable to Canadian dealers

On November 24, the U.S. Commodity Futures Trading Commission issued a no-action letter to extend, by up to a year, current relief from certain swap reporting rules applicable to certain non-U.S. swap dealers, including those established in Canada.

The relief to Canadian dealers, originally provided in CFTC Staff Letter No. 13-75 and set to expire no later than December 1, 2014, has now been extended until the earlier of (i) 30 days following the issuance of a comparability determination with respect to swap data reporting rules in Canada, and (ii) December 1, 2015.

For more information, see CFTC Staff Letter No. 14-141.

Sliver of light appears for issuers and noteholders in key UK negligence decision

Patrick Mc Guigan and Jeffrey Keey -

In a recent decision, the English High Court has held that a valuer was liable in relation to its negligent valuation of a property that was collateral for a securitised loan.  The judgment in Titan Europe 2006-3 plc v Colliers International UK plc (in liquidation) , will be of interest to investors, issuers and other participants in the CMBS industry that may be contemplating negligence claims against valuers.

The case arose out of a complex structured finance transaction.  The valuation concerned a property in Germany (the Property) which was owned by a company called Valbonne.  Credit Suisse identified the Property as suitable for a CMBS transaction.  The Property was subsequently valued at 135m Euro by Colliers and Credit Suisse agreed to lend 110m Euro to Valbonne based on the valuation.

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Overview of regulatory framework for Canadian asset managers

Alix d'Anglejan-Chatillon and Jeffrey Elliott 

The last few years have seen the development and implementation of various regulatory initiatives affecting the Canadian asset management industry, including amendments to the dealer, adviser and investment fund manager registration framework.

As such, we have recently drafted an overview of the Canadian regulatory framework for asset managers for the third edition of The Asset Management Review. The publication, released by Law Business Research, is also available as an e-book.

FSB proposes standards for global securities financing and data collection and aggregation

On November 13, the Financial Stability Board published a consultation report that sets out proposed standards and processes for global securities financing and data collection and aggregation. 

Among other things, the report includes proposals on data elements for repos, securities lending and margin lending, as well as recommendations to ensure consistency among national and regional data collection. 

The FSB is accepting comments on the proposal, including in respect of specific questions asked of stakeholders, until February 12, 2015.

OSC Staff take narrow view on application of "hedger" exemption under the CFA

Margaret GrottenthalerKenneth G. Ottenbreit and Terence W. Doherty - 

In a recently released staff notice, staff of the Ontario Securities Commission (OSC) have provided guidance on the availability of certain exemptions from the dealer registration requirement under the Commodity Futures Act (CFA) that we believe is contrary to the prevailing interpretation among market participants. As we reported in September, under OSC Staff Notice 33-744 – Availability of registration exemptions to foreign dealers in connection with trades in options and futures contracts under the Commodity Futures Act (Ontario) (the Notice), OSC staff take the view that an unregistered dealer may not rely on the “hedger” exemption and also take a very narrow view of the availability of the “unsolicited trade” exemption under the CFA.

In the Notice, OSC staff state their view that the hedger exemption is not available to an unregistered non-Canadian dealer that wishes to trade with a hedger. In our view, the longstanding and accepted interpretation of the hedger exemption has been that the exemption may be relied on by an unregistered non-Canadian dealer. The Notice represents a surprising and very restrictive interpretation of the availability of the “hedger” exemption commonly relied on by unregistered non-Canadian dealers when trading futures with Ontario resident “hedgers”, and runs counter to over thirty years of accepted legal interpretation and industry practice.

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AMF issues exemptions from trade reporting rule

On October 31, the Autorité des marchés financiers du Québec (the AMF) exempted the Fédération des caisses Desjardins du Québec (the Quebec Federation), all the Quebec Federation’s Caisse Desjardins members, the Quebec Federation’s subsidiaries, Caisse centrale Desjardins du Québec (Caisse centrale), the Fédération des caisses populaires de l’Ontario inc. (the Ontario Federation) and all of the Ontario Federation’s caisse populaire members (together, the Desjardins Group) from their obligations under section 26 of Regulation 91-507 to report derivatives trade data to a recognized central repository in respect of trades among the entities of the Desjardins Group.

The AMF highlighted the following facts in support of the exemption demand:

  • the AMF exercises prudential supervision over the Desjardins Group, including over the Ontario Federation and its members;
     
  • the Deposit Insurance Corporation of Ontario exercises prudential supervision over the Ontario Federation’s caisse populaire members; and
     
  • Caisse centrale acts as treasurer and financial agent within the Desjardins Group and as a counterparty both within the Group and externally.