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

P. Jason Kroft

It has long been a Kroft family tradition to spend a relatively significant amount of time discussing and documenting new year's resolutions (and it is also a long-standing tradition of discarding or ignoring the resolutions not long after January 2nd of each year). Each year at around this time I'll sit down to carefully draft my plans for the year in an attempt to chart out my year's goals, plans and objectives. The plans are, by design, ambitious, considered and comprehensive. As my final blog submission for the year, I thought I would share with our readers some of my own goals for next year in the hopes that they may entertain and potentially inspire.

In 2011, I would like to own a Bugatti sports car like Jay-Z, have one million Facebook friends and appear during an episode of HBO's 'Entourage'. I'd like to finally obtain that work/life balance that I've read about and find that the Loonie is well above par during my spring break trip to Miami. I'm hoping for sunny and dry summer months, peace and prosperity for my clients, contacts and friends and interesting and challenging work assignments. 

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On December 8, Ontario's Bill 135, the Helping Ontario Families and Managing Responsibility Act 2010, received Royal Asset. The Act amends the Ontario Securities Act and, among other things, (i) establishes a regulatory framework for trading in derivatives in Ontario; (ii) allows the Ontario Securities Commission to regulate credit rating organizations; (iii) provides the OSC authority to recognize and make decisions related to alternative trading systems and (iv) extends current prohibitions on insider trading and tipping to issuers that have a "real and substantial connection" to Ontario and whose securities are listed and posted on the TSX-V. Most of the amendments came into force on the day of Royal Assent, while certain provisions principally relating to the regulation of derivatives will not come into force until a date still to be proclaimed.

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Michael Rumball

While we wait for the other shoe to drop, perhaps it would be worthwhile to review the general state of play and try to better understand what it may mean for the securitization industry. Previous postings reviewed the various SEC proposals for Reg AB II individually. Taken as such they are unsettling. Collectively, they are truly alarming. If implemented these proposals would, most notably, require all participants in the public ABS markets to:

1. provide mandatory asset-level disclosure of an extraordinarily burdensome nature which may be inappropriate and/or unavailable in respect of several asset classes;
    
2. perform or arrange for a third party to perform an asset review and disclose the findings and conclusions;
    
3. disclose all demands for the repurchase of assets due to alleged ineligibility and arrange for related third party opinions on an ongoing basis;
    
4. require a minimum 5% risk retention in a “vertical slice” across all issued securities;
    
5. provide investors with a waterfall computer program capable of ABS modeling; and
    
6. provide CEO certification regarding the sufficiency of the pooled assets to generate the scheduled payments to investors.

 

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P. Jason Kroft -
On May 19, 2010, the SEC conditionally exempted until December 2, 2010 national recognized statistical rating organizations (NRSROs) from certain requirements in Rule 17g-5(a)(3) of the Securities Exchange Act of 1934 (the Rule), which had a compliance date of June 2, 2010. Under that May 19th order, the SEC provided that an NRSRO is not required to comply with the Rule until December 2, 2010 with respect to credit ratings where: (1) the issuer of the structured finance product is a non-U.S. person and (2) the NRSRO has a reasonable basis to conclude that the structured finance product will be offered and sold, upon issuance, and that any arranger linked to the structured finance product will effect transactions of the structured finance product after issuance, only in transactions that occur outside the U.S. On November 23, 2010, the SEC extended the temporary conditional exemption exempting NRSROS from complying with the Rule with respect to such non-U.S. transactions until December 2, 2011. Whereas some commentators had been hoping for a permanent exemption from application of the Rule for non-U.S. transactions, Canadian structured finance participants (arrangers in particular) now have an extra year to contemplate the operational, technical and legal ramifications of the Rule when applied to new rated transactions.

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