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.

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