Canadian Structured Finance Law : Canadian Structured Finance Law: Securitization/OTC Derivatives Blog by Stikeman Elliot Lawyers & Attorneys

As discussed back in April, federal Bill C-9, the Jobs and Economic Growth Act, which in part amends the Canada Deposit Insurance Corporation Act (CDIC Act) to clarify an exemption to the EFC safe-harbour, received First Reading in the House of Commons on March 29, 2010. The Bill has now passed both the House of Commons and Senate and received Royal Assent.

But for sections 1889 and 1890 of Bill C-9, the amendments to the CDIC Act are now in force. The remaining two sections, meanwhile, will come into force when section 245(7) of the Budget Implementation Act, 2009 come into force.

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On July 15, 2010, Quebec's financial services regulator, the Autorité des marchés financiers (the AMF), published two guidelines with respect to the investment management practices of financial institutions, including insurers, portfolio management companies controlled by an insurer, mutual insurance associations, financial services cooperatives and trust and savings companies governed by any of the following Quebec acts: An Act respecting insurance, An Act respecting financial services cooperatives and An Act respecting trust companies and savings companies.

Respectively, the "Investment Management Guideline" (at page 132) and the "Derivatives Risk Management Guideline" (at page 168) set out, in a principles-based approach, AMF guidelines with respect to the sound and prudent investment management practices that financial institutions are required to apply. A draft "Investment Management Guideline" (at page 137) had previously been circulated for public consultation by the AMF in November 2009, and the two recently circulated guidelines are a result of the consultation process. The AMF has stated that due to the complexity and risk-potential of derivatives, it has been decided to establish a separate guideline devoted specifically to derivatives risk management. The AMF has noted that its guidelines are based on core principles and guidance issued by international organizations, including the Basel Committee on Banking Supervision and the International Association of Insurance Supervisors.

The guidelines come into effect on August 1, 2010 and the AMF expects each financial institution to develop strategies, policies and procedures based on its nature, size, complexity and risk profile, to ensure the adoption of the principles underlying the guidelines by August 1, 2012. The AMF has also stated that where a financial institution has already implemented such a framework, the AMF may verify whether it enables the institution to satisfy the requirements of sound and prudent investment management practices prescribed by law.

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On July 15, the U.S. Senate passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was passed by the House of Representatives on June 30.  The legislation is intended to overhaul the financial system in the U.S. by improving the supervision and regulation of federal depository institutions, providing transparency to derivatives markets and setting out obligations regarding corporate governance and executive compensation.

The legislation also contains provisions directed specifically at the securitization industry and its perceived inherent flaws.  Many of these provisions cover territory touched upon in April by the Securities and Exchange Commission (SEC) in its proposed rules, including, most notably, those dealing with a proposed mandatory risk retention requirement and increased disclosure and reporting requirements.  It remains to be seen how deeply the SEC proposals and the Dodd-Frank Act provisions will influence the Canadian Securities Administrators’ forthcoming proposals regarding securitized products, as related in CSA Staff Notice 45-307 Regulatory Developments Regarding Securitization.  To date, there have been no indications from any of the applicable Canadian legislative bodies that they may be contemplating legislation containing provisions relating specifically to securitizations comparable to those of the Dodd-Frank Act.

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The Canadian Securities Administrators today published for comment a proposed rule, policies and related consequential amendments that would impose regulatory oversight for designated credit rating agencies and organizations. Under the proposals, credit rating organizations wishing to become designated for the purposes of having their credit ratings eligible for use where credit ratings are referred to in securities legislation would have to apply and, once designated, maintain and ensure compliance with a code of conduct that complies with the provisions of the IOSCO Code of Conduct Fundamentals for Credit Ratings Agencies of the International Organization of Securities Commissions. The IOSCO Code addresses such issues as: (i) the quality and integrity of the rating process; (ii) credit rating agency independence and the avoidance of conflicts of interest; (iii) credit rating agency responsibilities to the investing public and issuers; and (iv) disclosure of the code of conduct and communication with market participants. Deviations, however, from the provisions of the IOSCO Code would be permitted under certain circumstances.

Comments are being accepted by the CSA until October 25, 2010.

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P. Jason Kroft and Sarah Horan

On June 25, 2010, the Canadian Securities Administrators (CSA) published for comment proposed amendments to National Instrument 81-102 Mutual Funds (NI 81-102) and related instruments, which set out the regulatory framework for mutual funds under Canadian securities legislation. Certain of the proposed amendments are relevant for derivatives and securities lending, the salient aspects of which are described below.

The proposed amendments seek to codify frequently granted exemptive relief from the requirements under NI 81-102, create additional operational requirements for money market funds and generally update the instrument to reflect changes in the Canadian marketplace and the evolution of regulatory approaches to mutual funds in other major markets. Included among the amendments are several changes relating to the use of short-selling and specified derivatives by mutual funds.

Continue Reading...

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Lanette Wilkinson

On June 16, 2010, CSA Standards and the International Performance Assessment Centre for Geologic Storage of Carbon Dioxide (IPAC-CO2 Research Inc.) announced an agreement to develop Canada’s first carbon capture and storage (CCS) standard for underground storage. 

CCS is a process that involves the capture, transportation and injection of carbon dioxide emissions underground, which many believe is a promising technology to assist certain emissions-intensive industries to reduce CO2 emissions.  Several large-scale projects involving CCS have been announced in recent years in Saskatchewan, Alberta and British Columbia.

The proposed standard focuses primarily on long-term underground storage of CO2.  According to a representative of CSA Standards, the new standard will create guidelines for, and advance risk assessment expertise associated with, geological storage projects.  As mentioned in the March 2010 edition of Stikeman Elliott’s Emission Trading and Climate Change Update, risks associated with long-term storage include the reliability of injection and the effectiveness of ongoing monitoring and verification. In addition, the perpetual nature of storage also makes the siting of CCS important, including the specific geological characteristics of the proposed storage site and site-specific risks.  The development of this standard represents an opportunity to promote careful site selection while also instilling public confidence in the reliability and safety of long-term storage and monitoring and verification.  Ideally, the standard will contain important technical guidelines, while also remaining flexible enough to address site-specific characteristics, emerging technologies, and new information. 

It is intended that the completed standard will be submitted to the Standards Council of Canada for recognition.  If recognized, it could become the world’s first formally recognized standard in underground storage.
 

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On April 7, our securities colleagues described a proposed amendment published by the New Brunswick Securities Commission (NBSC) to Local Rule 91-501 Derivatives. LR 91-501, which came into force on September 28, 2009, imposes registration and risk disclosure requirements in respect of trades in "derivatives" as defined in the Rule, other than trades among qualified parties.

The proposed amendment was drafted to clarify the NBSC's intention that the exemption only applies where both parties are qualified parties acting as principal. As such, the amendment modifies the language respecting the exemption to state that the registration requirement does not apply "where each party to the trade is a qualified party acting as principal".

The NBSC has now stated that, subject to Ministerial approval, the proposed amendments will come into force on September 1, 2010.

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Jason Kroft

In a statement of June 18, 2010, the Basel Committee of central bankers and financial supervisors agreed to a one year delay in the effective date of the new capital rules on bank trading books. The Committee agreed to a coordinated start date of no later than December 31, 2011 for all elements of the trading book package including the securitization rules. The Office of the Superintendent of Financial Institutions Canada (OSFI) referred to this announcement in its own release on the same date. The Basel committee update has impacts for the Canadian implementation schedule as identified in the OSFI announcement in respect of same.  We will continue to monitor the Basel Committee’s activities and implications for banking practice and regulation in Canada.

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The Canadian Securities Administrators (CSA) today published CSA Staff Notice 45-307 Regulatory Developments Regarding Securitization, in which they announced their intention to publish proposals respecting securitized products in the fall. The Notice follows work completed by the CSA subsequent to the publication of their consultation paper on ABCP in October 2008, and states that the CSA's focus "has broadened to encompass all securitized products". The CSA are also considering international regulatory developments in developing their proposals, including recent IOSCO and SEC reports and recommendations.

According to the Notice, the CSA are specifically contemplating changes to the current approach to the issuance of securitized products in the exempt market, enhancements to the disclosure requirements for securitized products distributed by prospectus and changes to continuous disclosure for reporting issuers that have distributed securitized products.

The CSA also announced that they expect to publish proposals relating to the regulation of credit rating organizations this summer.

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