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

The Bank of Canada recently released a report, Financial System Review, intended to identify and consider potential risks to the Canadian financial system and promote public discussion regarding such risks. Of particular interest, the report considers the challenges of achieving fair and open access to central counterparty services in countries like Canada, which lack important global CCPs. While large Canadian dealers may access global CCPs, the criteria for direct membership in existing CCPs may exclude mid-tier institutions and fee structures may also put larger Canadian CCP members at a competitive disadvantage.

The report thus identifies two main elements designed to mitigate restricted access to global CCPs. First, the Bank of Canada suggests that access criteria and risk-management controls at CCPs could be designed to be proportional to the risk profile of the clearing performed by each CCP member. According to the report, this could "expand access to central clearing, deepen the risk-absorbing capabilities of CCPs, increase the liquidity and efficiency of OTC derivatives markets, and reduce the impact of the failure of a large global dealer." Second, the report suggests the development of a Canadian CCP, which would be better able to adapt risk-management practices to the Canadian market. In order to improve cost-efficiencies, a Canadian CCP could enter into linking arrangements local CCPs in other jurisdictions.

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The Canadian Securities Administrators today released a consultation paper that proposes a framework of rules for the reporting of OTC derivatives transactions and the operation of trade repositories. The paper builds on the high-level proposals released in CSA Consultation Paper 91-401, published in November 2010, and considers such issues as trade repository governance requirements, transaction reporting obligations and access to confidential trade repository information. The proposals, intended to provide consistency with international principles, are open for public comment until September 12, 2011. For more information, see CSA Consultation Paper 91-402 Derivatives: Trade Repositories.

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The Reserve Bank of Australia today released, on behalf of the Council of Financial Regulators, a discussion paper on central clearing of OTC derivatives in Australia. The paper is intended to act as a basis for consultation with interested stakeholders as regulators develop recommendations to the government. Comments on the discussion paper are being accepted until August 5.  Given some of the similarities between the Canadian and Australian markets, the paper may be of particular interest to Canadians.

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 Michael Rumball  -

One of the main questions that I have returned to at various times over the course of the last year has concerned the true motivation of the U.S. regulators in proposing the various ABS regulations. As these pile up one by one, the cumulative burden placed on the securitization industry is very troubling, especially when combined with other prudential rule-making such as revisions to the Basel capital standards and the implementation of Basel III and the new accounting standards embodied in FAS 166 and 167.   I concluded my year-end piece with the observation that the final rules would reveal the SEC’s true intentions towards the securitization market; whether it wants to regulate a revitalized securitization industry or simply to make sure that it can never cause problems again. At that time, I promised to take stock again as matters develop. It appears that at least two of the heavyweights in the U.S. ABS market have decided that the proposed Dodd-Frank Risk Retention Regulations have in fact revealed those intentions clearly enough for them to take firm action now.

Despite the fact that SEC announced last week that it was extending the comment period until August 1, each of the American Securitization Forum (ASF) and the Securities Industry and Financial Markets Association (SIFMA) chose to file massive comment letters on the original due date. In so doing, they have planted their standard in firm opposition to the Proposed Regulations, presumably hoping to thereby rally opposition around it. Each of them raise the alarm over the threat posed by the Proposed Regulations to the securitization market although they have come at it from slightly different perspectives. ASF’s main concern appears to be that the rules would unduly interfere in areas of the market which in fact continued to perform during the financial crisis (a mantra which, incidentally, has been chanted by us and many others in respect of the Canadian market as a whole). SIFMA, on the other hand, simply contends that the regulators have exceeded the mandate of the Dodd-Frank Act. Both of them see the result as being potentially devastating to the securitization market.

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The CSA has issued an extension for the consultation period for the draft securitization proposals that had been issued for consideration previously. In CSA Staff Notice 11-315 the end of the consultation period for the draft securitization rules has been extended from July 1, 2011 to August 31st. We continue to be available to discuss the draft securitization rules with interested parties and welcome hearing your own feedback on the draft proposals.

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Margaret Grottenthaler -

The Ontario Court of Appeal decision in Re Indalex released on April 7 is certainly the talk of the town in secured financing circles. Unless overturned, it will almost certainly have a significant negative impact on the availability of asset backed loans for entities with defined benefit pension plans given that it conferred priority over secured creditors (including the creditor subordinated to the rights of the super-priority DIP lender) for unfunded employer liabilities to the company’s defined benefit pension plans. As many appreciate, this liability is potentially a huge whack of dough for some companies. But does it have the same negative effect on credit support provided for derivatives transactions and other securities financing transactions, such as securities loans, repo and margin loans? I’m going to refer only to derivatives in this note, but similar comments apply to the collateral for securities financing arrangements. If you’re holding your breath, you can relax a bit because there are reasons why the decision is not likely to have the same impact on the typical collateral arrangement for derivatives transactions as it will have in the commercial finance context. It is problematic though with respect to cash collateral.

The Decision

If you haven’t yet read 20 law firm newsletters on this case, here’s a short description focusing on the aspects potentially relevant to derivatives markets and leaving out some of the details and my more colourful thoughts about the court’s analysis. You have to buy me lunch if you want those!

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