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

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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Insight Information recently held the 13th Annual ABS 2010 Canadian Structured Finance Forum from Sunday, June 6 to Tuesday, June 8, 2010 at Queen's Landing in Niagara-on-the-Lake, Ontario.  Mark McElheran moderated a panel entitled "Evolution of Product Distribution: Private Placements" in which Mark put to a panel of market participants the thoughts presented in the analysis piece co-authored by Doug Klaassen, Mark and David Allan and posted here last week .  These other panelists included Yatendra Killer of Honda Canada Finance Inc., Marie-Claude Morrissette of Nissan Canada Inc. and Jonathan Zamir of Bank of America Merrill Lynch.

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The Canadian Securities Administrators (CSA) today published revised guidance relating to the reporting of certain derivative-based transactions, including equity monetizations, intended to "assist reporting insiders who have entered into such transactions and to promote consistency in filings." The notice provides examples of arrangements and transactions involving derivatives along with guidance as to how to report these arrangements and transactions on SEDI. A revised notice was also published by the CSA setting out questions and answers intended to assist users in filing information on SEDI. The Q&As are set out based on the steps in the SEDI filing process and the type of SEDI filer.

You may also want to see our securities colleagues' previous post of April 21 regarding the newly-implemented insider reporting requirements and their post of April 29 regarding the CSA's FAQ on the new requirements.

Guidance: CSA Staff Notice 55-312 Insider Reporting Guidelines for Certain Derivative Transactions (Equity Monetization) (Revised)
Q&A: CSA Staff Notice 55-316 Questions and Answers on Insider Reporting and the System for Electronic Disclosure by Insiders (SEDI)

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Margaret Grottenthaler

Our securities colleagues recently published a note on their blog regarding IIROC's recent proposed amendments to its Dealer Member Rules that would address the fairness of pricing and transparency of OTC market transactions. IIROC's proposals would: (i) require dealers to fairly and reasonably price securities traded in OTC markets, with an exception for primary market transactions and OTC derivatives set out in the rule; (ii) require dealers to disclose yield to maturity on trade confirmations for fixed-income securities and notations for callable and variable rate securities; and (iii) require dealers to include on trade confirmations sent to retail clients in respect of OTC transactions a statement indicating that they have earned remuneration on those transactions unless the amount of any mark-up or mark-down, commissions and other service charges is disclosed on the confirmation.

Of particular note, the proposed rule specifically excludes OTC derivatives "which are non-standardized contracts customized to the needs of a particular client and for which there is no secondary market."

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Margaret Grottenthaler

Many complicated conflicts of laws issues arise in a structured finance practice, which is, of course, one of the things that makes this practice area so much fun. Unfortunately it is also one of the things that make assessing legal risk so challenging. One of the legal issues you always want to be sure of is that the counterparty has the capacity to enter into the proposed transactions. Combine capacity and conflict of laws issues and you’ve got the complicated situation faced by the English Court of Appeal in Haugesund Kommune & Anor v. Depfa ACS Bank, [2010] EWCA Civ 579 (May 27). The appellants were two Norwegian municipal governments (called Kommunes) that had entered into what were called zero coupon swaps. (Before you get too excited and think this case is actually about swaps, it isn’t. The swap was in substance a loan by an Irish bank to the Kommunes. Nevertheless, the issues addressed are highly relevant to derivatives and other structured finance transactions.) Having invested the borrowed money (in CLNs and CDOs) and lost most of it, the Kommunes were arguing that they did not have the capacity to enter into the borrowing transaction and, consequently, it was void. They were hoping that meant that they didn’t have to pay the bank back. They were wrong.

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David Allan, Doug Klaassen and Mark McElheran

While the broader and more politically-charged aspects of the regulatory response to the debt crisis of 2008-09 remain largely unresolved, securities regulators have already begun the process of mapping out the implications of this crisis for the ABS market. The generalities of the recent recommendations of the International Organization of Securities Commissions (IOSCO) have already given way to the specific and detailed agenda set forth by the SEC in its reform proposals approved for public comment on April 7, 2010. While the main tenets of the reforms – greatly increased transparency, CEO accountability and risk participation by program sponsors – are interesting and merit discussion and debate, the proposed mechanism for mandating reform is intriguing in and of itself, and particularly so in the Canadian market context.

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Margaret Grottenthaler

That darn Lehman Brothers bankruptcy sure is raising some interesting insolvency issues for derivatives market participants (and their lawyers of course). It’s interesting (at least for us insolvency nerds) to think about how some of those issues might play out under Canadian insolvency laws. Here are some thoughts on one of the recent cases with my Canadian spin.

The mutuality issue as it relates to netting under an ISDA Master Agreement that most often concerns market participants is whether netting protections apply to a netting agreement that seeks to include transactions with a counterparty’s affiliates within the netting calculation. That is the paradigm tri-party or non-mutual netting situation. The recent Lehman decision precluding set-off by Swedbank AG against amounts owed to it by Lehman Brothers Holding Inc. (LBHI) isn’t about non-mutual affiliate set-off. The parties had taken care of that particular mutuality issue by having LBHI guarantee its affiliates obligations under ISDA Master Agreements. (This would also be the practice in Canada to ensure that the obligations would be within the netting safe-harbours.) 

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P. Jason Kroft

Under the SEC’s Release 34-61050, published in December 2009, additional disclosure and conflict of interest requirements were imposed on nationally recognized statistical rating organizations (NRSROs) in the United States. The Release amended Rule 17g-5 of the Securities Exchange Act of 1934 (the Act) in an effort to address concerns of the SEC about the integrity of credit rating procedures and the methodologies of NRSROs. One of the goals is to facilitate unsolicited ratings in respect of a structured finance issuer from an NRSRO not otherwise engaged by such structured finance issuer as a counter-balance to the objectivity challenges that arise for rating agencies that receive fees from originators/sponsors in connection with the delivery of ratings. Where NRSROs that are not engaged by a structured finance issuer have reasonable access to information about a proposed rated issuance they will not be at a disadvantage in generating an unsolicited rating of the subject issuance when compared to the NRSRO that had been engaged by the structured finance issuer for that purpose.

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Margaret Grottenthaler

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 received second reading (April 19, 2010) and was referred back from the Finance Committee on May 14 without amendment.

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Jeff Hershenfield

On April 30, 2010, National Instrument 55-104 Insider Reporting Requirements and Exemptions (NI 55-104) and its Companion Policy NI 55-104CP came into force across Canada, launching a new insider reporting regime. With this new regime, the Canadian Securities Administrators (CSA) introduces several significant changes to insider reporting generally, including important changes to insider reporting of derivative transactions, as discussed below. (For a more detailed explanation of NI 55-104, see this post on our securities law blog.)

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Margaret Grottenthaler

ISDA has written to the governments of Alberta and Ontario to recommend amendments to the provincial PPSAs dealing with cash collateral.  The letters explain the importance of cash collateral arrangements in financial markets, including derivatives transacting and securities lending.  The recommendation is that the provinces adopt a regime similar to that under the U.S. Uniform Commercial Code, to permit perfection by control of a deposit account.  To see the letters sent in June, 2009 and April, 2010, click on the links below.

ISDA Letter to Alberta and Ontario Governments of April 13, 2010
ISDA Proposal for Amendments to Treatment of Deposit Accounts under PPSA of June 8, 2009

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Margaret Grottenthaler

ISDA has recently (May 4, 2010) published a set of guidelines endorsed by its Canadian Legal and Regulatory Affairs Committee for the treatment of credit support in the form of cash under the Credit Support Annex governed by New York law. The guidelines are intended to express a reasonable approach to the issue of perfection with respect to this type of credit support.

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