CDIC publishes guidance note on bank resolution

Margaret Grottenthaler - 

While reading the provisions of the Canada Deposit Insurance Corporation Act dealing with member institution resolution regimes is excellent brain exercise, you might prefer to read the much less challenging and newly published guidance note from CDIC.  The Guidance on Exercise of Eligible Financial Contracts Close-out Rights in a Resolution Scenario very helpfully explains how CDIC anticipates that the regulatory powers of CDIC and the Finance Ministry – particularly those new powers added in the June amendments – would in practice be exercised in relation to eligible financial contracts, including derivatives and securities financing arrangements, when a member financial institution is financially distressed.

The strong message in the Guidance is that the intention of the amendments is to implement the Financial Stability Board’s Key Attributes of Resolution Regimes for Financial Institutions (FSB Key Attributes).  The FSB Key Attributes require that termination rights triggered by resolution events – such as bail-in measures or transfers to a bridge institution or creditworthy third-party purchasers – be suspended so as not to compromise the effectiveness of those measures, but that termination rights otherwise be enforceable or only temporarily suspended.  The part of the Guidance that best explains the overall effect of the resolution regime is the following:

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Compromise cash collateral proposal recommended - Ontario seeking input

Margaret Grottenthaler - 

Ontario’s Business Law Advisory Committee, which advises the province’s Ministry of Government and Consumer Services, is proposing a compromise solution to the issue of perfecting security interests in cash collateral.  As those following the cash collateral saga know, the sticking point with amending the regime to allow perfection by control (and a first priority based on control) for cash collateral has been the statutory priority that pension plans enjoy over “accounts” with respect to contributions owed by the debtor employer. As a result of the Sun Indalex case, the potential priority liability includes unfunded liabilities in defined benefit plans. The Committee’s proposed solution is to allow perfection by control for all accounts while subordinating the pension plan priority under the PPSA if and only if the obligations secured relate to “derivatives”. 

While it’s easy to appreciate the need for some form of compromise, it is not going to be all that easy to implement this proposal. Among the many issues that will need to be addressed are the following:

  • How will “derivative contract” be defined?  The report seems to suggest that this refers only to OTC derivatives, but futures will also have to be included.
  • Why not securities loans and repos, which also need certainty in order to qualify for capital relief?  Including them would be consistent with the federal insolvency laws.
  • How will this affect rights of set-off under section 40 with respect to other types of obligations?  It would be a shame if this proposal were implemented in a way that compromised the section 40 rights that should apply to title transfer collateral arrangements used in many lending markets, not just derivatives. 
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Notice issued to help interpret product determination and trade reporting rules in Canadian jurisdictions governed by MI 96-101

Alison Beer - 

On September 29, 2016, the securities regulators of Alberta, British Columbia, New Brunswick, Newfoundland & Labrador, Northwest Territories, Nova Scotia, Nunavut, Prince Edward Island, Saskatchewan and Yukon (the Participating Jurisdictions) published CSA Multilateral Staff Notice 91-305. This Notice answers specific questions about how certain aspects of the product determination and trade reporting rules (and related companion policies) should be interpreted.[1]

The Notice will be a useful reference for those who haven’t already spent a lot of time considering the rules. However, while it provides useful clarification on a number of points, it isn’t a substitute for a close reading of the rules, which (as always) are full of nuances and subtleties that can significantly influence the analysis of a real-world fact situation.

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Canadian Securities Administrators publish consultation paper on margin requirements for non-centrally cleared derivatives

Alison Beer

Yesterday the CSA published for comment a Consultation Paper proposing a framework for margin requirements on non-centrally cleared derivatives. The invitation to provide comments on the proposal ends September 6, 2016.

The requirements under the Consultation Paper are based on the minimum standards for margin requirements for non-centrally cleared derivatives developed by the Basel Committee on Banking Supervision (BCBS) and the International Organization for Securities Commission (IOSCO) (the BCSBS-IOSCO Standards) that apply to certain financial entities and systemically important non-financial entities. The CSA has also stated that the proposed framework is largely consistent with OSFI Guideline E-22 on Margin Requirements for Non-Centrally Cleared Derivatives applicable in Canada to federally regulated financial institutions (FRFIs). FRFIs will not be subject to the proposed framework (although FRFI’s are included in the definition of “financial entities” for the purpose of defining the “covered entities” with which a counterparty that is not a FRFI will be required to exchange margin).  

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ASC and other securities regulators issue limited blanket relief from certain derivatives trade reporting requirements

The securities regulatory authorities in Alberta, New Brunswick, Nova Scotia and Saskatchewan are providing discretionary relief from certain requirements Multilateral Instrument 96-101 Trade Repositories and Derivatives Data Reporting (MI 96-101).  Blanket Order 96-501 Relief from Certain Derivatives Reporting Requirements (Blanket Order 96-501) exempts reporting counterparties from some requirements of MI 96-101 where reporting counterparties are unable to obtain certain information from their counterparties and where foreign laws prevent or hinder reporting.

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BCSC issues guidance on trade reporting and product determination rules

The British Columbia Securities Commission (BCSC) has advised market participants that Multilateral Instrument 91-101 Derivatives: Product Determination and Multilateral Instrument 96-101 Trade Repositories and Derivatives Data Reporting (MI 96-101) as well as amendments to MI 96-101 are targeted to come into force before July 29, 2016, subject to obtaining necessary governmental approvals.  That is also the date when mandatory trade reporting begins for clearing agencies and derivatives dealers in Alberta, British Columbia, New Brunswick, Newfoundland and Labrador, the Northwest Territories, Nova Scotia, Nunavut, Prince Edward Island, Saskatchewan and Yukon.

The BCSC has advised clearing agencies and derivatives dealers that the onboarding process with trade repositories may take several weeks to complete. The BCSC also reminded market participants that persons eligible to receive a legal entity identifier (LEI), other than individuals, must obtain a LEI prior to entering into a derivatives transaction that must be reported under MI 96-101.  

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Equity Derivatives in Canada - What you need to know

William Scott and Jonathan Willson of our Toronto office and François Gilbert of our Montreal office recently co-authored the Canadian chapter of the inaugural issue of Getting the Deal Through: Equity Derivatives 2016 (contributing editors: John M. Brandow, Ray Ibrahim and Mark Mendez, Davis Polk & Wardwell LLP).  Published by Law Business Research Ltd., it follows a question-and-answer format and covers an array of legal, regulatory and tax issues relating to trading in OTC and listed equity derivatives in Canada and elsewhere around the world. To access a copy of the Canadian chapter, click here

CSA adopts recovery guidance for recognized clearing agencies

The CSA has adopted amendments to the Companion Policy (CP 24-102) to National Instrument 24-102 Clearing Agency Requirements (NI 24-102) effective June 3, 2016.  The amendments are intended to help clearing agencies develop recovery plans before the end of 2016.

On December 3, 2015, the CSA published for comment proposed amendments to CP 24-102.  The amendments to CP 24-102 provide supplementary guidance on the recovery and orderly winding-down planning of domestic recognized clearing agencies which are also subject to oversight by the Bank of Canada.  These Canadian authorities expect those clearing agencies to meet the standards related to recovery and orderly wind-down set out in a report published by the Bank of International Settlements Committee on Payments and Market Infrastructure entitled Principles for Financial Market Infrastructures.  The supplementary guidance can be found in Annex 1 to CP 24-102.

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Canadian Bank Bail-in Amendments Affecting Netting Laws Passed and In Force

Margaret Grottenthaler -

Bill C-15, including the proposed amendments to the Canada Deposit Insurance Corporation Act (CDIC Act) passed and received Royal Assent on June 22.  Other than certain provisions relating to domestically systemically important institutions the amendments are now in force. The changes enhance the resolution powers of CDIC and are intended to make Canada a Protocol-Eligible Regime under the ISDA 2015 Universal Stay Protocol. It’s now time to update those netting opinions to address the changes to the eligible financial contracts safe-harbour (EFC exemption). What follows is a brief summary of the changes relevant to eligible financial contracts, which largely repeats our earlier post on this subject.

CDIC Can Make Broader Range of Orders

The CDIC Act restructuring regime allows CDIC to make a broader range of orders under s.39.13 with respect to an insolvent member institution (an Order), including, in the case of domestic systemically important banks, an order to convert its prescribed shares and liabilities to common shares (see our earlier related post by Peter Hamilton here).

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Ontario, Manitoba and Quebec Adopt Useful Amendments to the Trade Reporting Rules

Margaret Grottenthaler and Alison Beer - 

I’d like to introduce Alison Beer and her first contribution to the Canadian Structured Finance Law blog.  Alison has recently joined Stikeman Elliott’s financial products group as a senior associate and we look forward to many future posts to keep you informed on legal developments in Canadian derivatives and securities financing markets.  Margaret

The anticipated amendments to the rules on reporting derivatives data in Ontario, Quebec and Manitoba are expected to come into force on July 29, 2016.  Highlights of the final amendments to OSC Rule 91-507 Trade Repositories and Derivatives Data Reporting; MSC Rule 91-507 Trade Repositories and Derivatives Data Reporting include:

  • Exempting inter-affiliate trades from reporting (and not just those between “local” counterparties)
  • Pushing back the effective date for requiring trade repositories to publicly report derivatives data to January 16, 2017
  • Simplifying the timing convention used for releasing derivatives data publicly: it’s now 48 hours after execution of the trade
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