I spoke at the CASLA conference yesterday about the pending regulatory developments in Canada with respect to the early warning regime and changes to National Instrument 81-102 and prepared a short article on these changes. Previous items in this blog have covered these developments generally, but the paper focuses on the securities lending aspects of the proposed developments. Other materials from the conference will soon be posted on the CASLA website. This third annual conference organized by the Canadian Securities Lending Association was very well attended and extremely informative
Categories of registration and business triggers under CSA's proposed derivatives registration regime
As we discussed last month, the Canadian Securities Administrators Derivatives Committee recently published Consultation Paper 91-407 Derivatives: Registration, which contains regulatory proposals specific to the implementation of a registration regime for derivatives market participants in Canada. Under the Paper’s proposals, the imposition of “derivative-appropriate” registration requirements would be based on the type of activity conducted by derivative market participants regardless of the nature of the underlying asset.
The Committee developed the proposals in light of Canada’s G20 commitments to improve the regulation and oversight of OTC derivatives markets and with consideration of derivatives registration regimes in the U.S. and Europe. While the Committee also considered the existing securities regulatory framework, the proposed business triggers for derivatives registration and the requirements applicable to registrants would be substantially different than those applicable in the securities context, given the differences in the purpose of trading, the existence of risk-amplifying leverage in most categories of derivatives and the complexity of derivatives contracts.Continue Reading...
Margaret Grottenthaler -
According to the Ontario budget released today, personal property security legislation will be amended to make it easier for businesses and financial institutions to provide or obtain first‐priority security interests in cash collateral. Sound familiar? That’s what the last budget said. But the budget does recognize that significant progress has been made on the government's proposals, and key aspects will be finalized pursuant to further consultations.
I think we can read into that that the government generally accepts the approach of the OBA’s Personal Property Security Law sub-committee proposing a perfection by control regime for cash, but that there are some details to work out. We all know the devil is in the details though!
On May 1, the U.S. Securities and Exchange Commission proposed new rules and interpretive guidance setting out how the comprehensive regime for regulating swaps introduced by Dodd-Frank would apply to cross-border activities involving securities based swaps regulated by the SEC.
Of interest to Canadian market participants is that the SEC's proposals adopt a substituted compliance approach and provide some detail around how that will work in cross-border transactions. It proposes a regime whereby there may be substituted compliance accepted for some purposes (e.g. registration) but not others (e.g. trade reporting) depending on the SEC’s position with respect to regulation of that area in the substituted jurisdiction.
The SEC is accepting public comments on the proposed rules, including potential alternatives, for 90 days after publication in the Federal Register. For more information, see SEC Release No. 34-69490.
The European Commission recently prepared a brief report of the OTC Derivatives Regulators Group that sets out the progress to date made among international regulators with regards to dealing with the extra-territorial aspects OTC derivatives regulation.
Specifically, the report considers such issues as (i) the scope of regulation and recognition, equivalence or substituted compliance for cross-border compliance; (ii) the bases for determinations of comparability of the applicable regime in a jurisdiction; (iii) the treatment of regulatory gaps; (iv) the understanding among regulators on the timing of new regulatory requirements; (v) the understanding on sharing of information and supervisory and enforcement cooperation; and (vi) data access.
The report also sets out the expected issues to be considered in the upcoming months, including with respect to identifying issues regarding the provision of information to trade repositories, as well as regulators' access to such trade repositories.
The Canadian Securities Administrators today released the latest in a series of consultation papers considering the regulation of derivatives in Canada. Specifically, CSA Consultation Paper 91-407 considers the regulation of derivatives market participants through the implementation of a registration regime.
Under the recommended regime articulated by the paper, three categories of registration would be created, namely those of (i) derivatives dealers, being persons carrying on the business of trading in derivatives or holding themselves out to be carrying on that business; (ii) derivatives advisers, being those carrying on the business of advising others in respect of derivatives, or who hold themselves out to be in that business; and (iii) large derivative participants, being entities, other than derivatives dealers, that have a substantial aggregate derivatives exposure.
Those required to be registered under the proposed regime would then be subject to various requirements respecting such things as proficiency, solvency, honest dealing obligations, and gatekeeper and business conduct requirements in the case of derivatives dealers and advisers. Exemptions from registration requirements would also be available in certain circumstances. For example, clearing agencies would generally not have to register, and foreign derivatives advisers and dealers would be exempted from specific regulatory requirements where they are subject to equivalent requirements in their home jurisdictions.Continue Reading...
Almost two years after the passage of the Dodd-Frank Act, the overhaul of the US derivatives market is rapidly shifting into the implementation phase. While most provisions of the Dodd-Frank Act are directed at US Swap Dealers (SDs) and Major Swap Participants (MSPs), some of the Dodd-Frank rules also affect Canadian counterparties that don't deal in or speculate with swaps but use swaps merely to hedge exposures in their business or investments (End-Users). By May 1, 2013, all End-Users must have provided their SDs with certain information and representations in order to enable SDs to comply with the Commodity Futures Trading Commission’s external business conduct rules (the Business Conduct Rules).
It is important to note that SDs will only continue offering and executing swaps with End-Users who have provided such information. As such, End-Users who have not already been contacted by their SD counterparties regarding this deadline may want to consider approaching the relevant SDs to discuss this matter, as these rules may have application for Canadian End-Users that engage in derivatives transactions with US Swap Dealers.Continue Reading...
The Ontario Securities Commission today released its draft statement of priorities for the upcoming year, which sets out the actions the OSC intends to take during fiscal 2013-2014.
Key OSC priorities include: (i) expanding outreach to the investor community; (ii) publishing an initial assessment of the application of the best interest standard for advisers and dealers; (iii) providing investors with more effective and meaningful disclosure through publication of a rule requiring advisers and dealers to provide cost disclosure and performance reporting in client statements, as well as publication of final proposals for delivery of Fund Facts; (iv) advancing the discussion on mutual fund fees and fees for other investment products; (v) considering the regulatory issues posed by new capital-raising strategies such as crowdfunding; (vi) examining issues associated with the evolution of markets, including electronic trading and the impact of the order protection rule; (vii) intensifying the enforcement program and targeting the most serious harm; and (viii) developing rules for an OTC derivatives regulatory framework, including for clearing and trade reporting.
The OSC is accepting comments on its draft statement until June 3, 2013. For more information, see OSC Notice 11-768.
The Ontario Securities Commission yesterday released a staff notice setting out the issues that investment fund managers should consider in light of the recent federal budget. Specifically, under proposed amendments to the Income Tax Act, distributions to unitholders of a mutual fund resulting from partial or full settlements of a forward agreement will now be treated as income distributions.
According to OSC Staff, investment fund managers should consider the effects of these changes on their funds, specifically with respect to disclosure obligations, especially if the income conversion feature is an "essential" aspect of the fund. The notice also suggests that managers consider whether to cap affected funds to new and additional investments, whether changes to funds' investment objectives and strategies will be needed, and whether funds need to be restructured, reorganized or terminated.
For more information, see OSC Staff Notice 81-719.
The Canadian Securities Administrators (CSA) have published for comment proposed amendments to the reporting threshold, triggers and related disclosure requirements under Canada’s early warning reporting (EWR) regime intended to “provide greater transparency about significant holdings of issuers’ securities”. These amendments could affect the conduct of certain equity derivative transactions and related hedging activities.
Currently, under the EWR regime, prescribed disclosure is required by any investor that acquires beneficial ownership of or the power to exercise control or direction over 10% or more of any class of a public company’s voting or equity securities. Additional reporting is required on each incremental acquisition of 2% as well as a change in a material fact contained in an earlier report. Certain eligible institutional investors (EIIs) can take advantage of relaxed timing requirements for early warning reporting under the alternative monthly reporting (AMR) regime.Continue Reading...
The Canadian Securities Administrators yesterday proposed changes to National Instrument 81-102 Mutual Funds (NI 81-102) that would introduce core operational requirements for publicly offered non-redeemable investment funds generally analogous to the requirements applicable to mutual funds.
This "Phase 2" of the CSA's Modernization of Investment Fund Product Regulation Project involves significant changes to the regulation of non-redeemable investment funds. Key elements of the proposals include (i) extending the application of investment restrictions under NI 81-102 to non-redeemable investment funds; (ii) imposing a 10% concentration restriction (with fixed portfolio ETFs permitted to exceed this limit); (iii) limiting investments in physical commodities and specified derivatives with underlying interests in physical commodities; (iv) imposing a cash borrowing limit of up to 30% of NAV (and permitting borrowing only from "Canadian financial institutions" and limiting borrowing activities to cash borrowing only); and (v)limiting investments in mortgages to guaranteed mortgages only. In addition, dilutive securities issuances would be prohibited with specific prohibitions on the ability to issue warrants or similar securities.
Non-redeemable investment funds would also be prohibited from investing in other non-redeemable investment funds (fund-of-funds) while a larger portion of fund assets would be permitted to be invested in illiquid assets. The proposals would also impose a framework for securities lending, repurchases and reverse repurchases similar to that applicable to mutual funds and introduce new requirements for the manager to bear the organizational costs of launching a new fund, as well as prescribe requirements governing conflicts of interest and circumstances where regulatory and/or securityholder approval will be required for certain fund or management changes. Changes are also proposed to requirements for custodianship of assets, redemptions and prescribed prospectus disclosure.
While the proposals relate principally to non-redeemable investment funds, some of the proposed amendments would also impact mutual funds.Continue Reading...
Specifically, under the proposal, each IIROC dealer member would have to report on a post-trade basis all debt market transactions executed by the dealer member, including those executed on an Alternative Trading System (ATS) or through an Inter-Dealer Bond Broker (IDBB).
For these purposes, “debt securities” would mean any securities that provide the holder with a legal right, in specified circumstances, to demand payment of the amount owing, including in respect of a debtor-creditor relationship. The fact that a security was issued in another country or denominated in a foreign currency would not disqualify it from being a debt security and the term would include securities with short-term maturities or mandatory tender periods such as commercial paper and floating rate notes as well as traditional notes and bonds. Debt securities, however, would not include derivative products that are not securities (e.g., futures contracts, interest-rate swaps).Continue Reading...
Swaps market participants accepting cash collateral from an entity subject to Ontario provincial pension benefits legislation will want to consider the implications of this decision on their priority. Unfortunately and somewhat surprisingly, the Supreme Court of Canada did not overturn a key part of the Ontario Court of Appeal’s decision. Four of seven judges agreed that the deemed trust under the Pension Benefits Act (Ontario) (PBA) and, consequently, the statutory priority conferred on that trust under the Personal Property Security Act (PPSA) applied to the statutory liabilities of an employer to fund certain deficiency payments that arise during the wind-up of a pension plan. The secured creditor with an assignment of the DIP financing ultimately prevailed in its appeal on the basis of other arguments and was found to take priority over the deemed trust, but it did not prevail on this fundamental issue regarding the liabilities covered by the deemed trust.
In our blog post on the Court of Appeal decision we addressed whether the decision had a negative effect on credit support provided for derivatives transactions and other securities financing transactions, such as securities loans, repo and margin loans. As stated in that post, there is potential for the deemed trust to take priority over cash collateral accounts where Ontario law alone governs priority, because the PPSA gives the deemed trust priority with respect to “accounts”, and cash collateral arrangements are characterized as “accounts”. The priority and deemed trust applies not only to wind-up deficiencies, but also other amounts the employer owes to the pension fund (e.g. delinquent current service costs and remittances on behalf of employees). As a practical matter, the other liabilities subject to the deemed trust tend to be in a less significant amount and, consequently, they get paid from the assets readily available to the insolvency representative if they are in arrears. The wind-up deficiency amount, however, can be extremely large with respect to defined benefit plans, and essentially unascertainable until wind-up occurs. This is what makes the decision particularly concerning. There is no legal requirement to share the pain of the deemed trust among secured creditors, so the most readily accessible assets tend to fund the liability. The deemed trust beneficiaries may be looking further afield, however, when it comes to the deficiency liability and a nice healthy pool of cash collateral may look very attractive. Swap providers may not have the same influence in insolvency proceedings as the employer’s lending syndicate to force the employer into bankruptcy (where the deemed trust is clearly subordinated to secured creditors). I’ll first briefly review the parts of the decision that are relevant to the cash collateral issue. I will then tell you why I think it might affect priority for cash collateral (but not securities collateral) and offer some recommendations for dealing with this issue.Continue Reading...
The Office of the Superintendent of Financial Institutions Canada (OSFI) yesterday released a progress update with respect to the implementation of G-20 reforms for OTC derivatives markets.
According to OSFI, federally-regulated deposit-taking institutions can expect updates to various guidelines, including the Derivatives Best Practices Guideline (B-7), during 2013 in response to international regulatory convergence. OSFI also notes that central clearing principles and other changes to bilateral counterparty risk management will be reflected in Guideline B-7. Meanwhile, while capital requirements for large bank-to-bank and bank-to-shadow bank exposures in OTC derivatives markets have been increased with the recent updates to OSFI's Capital Adequacy Requirements guideline, additional capital requirements for the risk of credit valuation adjustments to derivatives are being delayed until January 2014.
OSFI's initiatives in this area complements the work currently being undertaken by the Canadian Securities Administrators towards fulfilling its G-20 commitments to regulate OTC derivatives markets.
On December 31, 2012, the Alberta Securities Commission replaced Blanket Order 91-503 with Blanket Order 91-505 Over-the-Counter Derivatives.
As we discussed in an earlier post, an initial version of Rule 91-505 was published in February 2011, with a revised rule proposed in October 2012. As discussed at the time, the revised proposal reintroduced the concept of “qualified parties” and created an exemption from the prospectus and registration requirements for all over-the-counter OTC derivatives (included in the definition of “futures” in the Alberta Securities Act) contracts where each party is a qualified party, subject to the potential for incremental future requirements as may be imposed as a result of the CSA’s ongoing initiatives relating to trade reporting, clearing and other associated matters in relation to derivatives.
The final Blanket Order is consistent with the form of the October proposal.
CSA publishes model rules on trade repositories, derivatives data reporting and the determination of derivatives
On December 6, 2012 the OTC Derivatives Committee of the Canadian Securities Administrators (the Committee) published for interim guidance and comment CSA Staff Consultation Paper 91-301. This is a noteworthy step in the efforts by provincial securities regulators to fulfill Canada’s G-20 commitments to regulate OTC derivatives.
The paper sets out two model provincial rules and accompanying model explanatory guidance pertaining to, firstly, trade repositories and derivatives data reporting (the TR Rule) and, secondly, the determination of products which will be treated as derivatives for purposes of the TR Rule (the Scope Rule). The Committee sets out the implementation process, stating that once comments on the model rules have been considered, they may be modified and then each Canadian jurisdiction will need to publish for comment its own rules, explanatory guidance and appendices with appropriate local modifications. The Committee recognizes that this may result in some differences in the final rules from jurisdiction to jurisdiction, but their stated intention is that the substance of the rules be the same across all jurisdictions and that market participants in derivatives products receive the same treatment throughout Canada.Continue Reading...
On December 14, Bill C-45, designed to implement certain measures of Budget 2012, cleared the Senate and was given Royal Assent.
As we've discussed in previous blog posts, the Bill amends the Payment Clearing and Settlement Act and Canada Deposit Insurance Corporation Act to support central clearing of OTC derivatives, enhance federal powers to deal with insolvent deposit taking institutions and introduce a new temporary stay on eligible financial contracts when an order incorporating a bridge institution is made.
The relevant provisions came into force on the date of Royal Assent.
The Canadian Securities Administrators yesterday published for comment model provincial rules to introduce a framework for the regulation of derivatives across Canada. Specifically, the model rules would set out the scope of derivatives products and provide for regulations respecting trade repositories and derivatives data reporting. The model rules, which are based on Ontario's Securities Act, are intended to provide a "responsive and flexible" foundation for derivatives regulation.
Comments on the model rules are being accepted until February 4, 2013. Check back next week for further commentary.
The uncertainty around the extent of the extra-territorial reach of the Dodd-Frank Act into the business of Canadian and other non-U.S. market participants has been a major concern. Regulators are well aware of this concern and have their own reasons to want to reduce regulatory conflict. It is top of their agenda as well. To that end, on November 28, regulatory authorities from various international jurisdictions (including the OSC and AMF) met in New York to discuss reform of the cross-border OTC derivatives market. It looks as though progress was made but much work is yet to be done.
While the authorities noted that complete harmonization across jurisdictions would be difficult, their joint release identified the need to reduce regulatory uncertainty and reduce the application of conflicting rules. Ultimately, the meeting, which included representatives from the Ontario Securities Commission, Quebec's Autorité des marchés financiers, the Australian Securities and Investments Commission, Brazil's Comissão de Valores Mobiliários, the European Commission and European Securities and Markets Authority, Hong Kong's Securities and Futures Commission, Japan's Financial Services Agency, the Monetary Authority of Singapore, the Swiss Financial Market Supervisory Authority, and the U.S. Commodity Futures Trading Commission and Securities and Exchange Commission, was intended to continue moving towards the goal of an enhanced regime of OTC derivatives regulation, as pledged by G-20 leaders in 2009.Continue Reading...
If you're looking for quick access to standard industry documentation, like IIROC's securities loan agreements or SIFMA's standard forms, make sure you bookmark our blog's Resources page. Links to provincial securities transfer legislation and other resources are also provided.
Many industry associations also maintain resource libraries. For example, CASLA's resources page provides information on such topics as IIROC regulatory updates, Dodd Frank developments and potential effect on the Canadian market, and insights from CASLA's recent roundtable held to discuss the effects of the eurozone crisis and regulatory trends.
Canada proposes amendments to Payment Clearing and Settlement Act to facilitate clearing of OTC Derivatives
Bill C-45 proposes changes to the Payment Clearing and Settlement Act to enhance certainty that clearing house default rules will be enforceable in the event of a clearing member default. These reforms are an important aspect of financial markets reforms that provide incentives for and, in some cases, require standardized OTC derivatives to be cleared. The proposed changes will do two things: (1) they will enhance the stability of the clearing house itself by ensuring it can quickly apply its default rules as against a defaulting member and (2) they will enhance client protections by ensuring that the clearing member’s insolvency will not impede the transfer to new clearing members of client positions.
Part I of the PCSA applies to clearing and settlement systems that are designated by the Bank of Canada (under section 4) as systemically important in Canada. It involves some regulatory oversight as well as protection for the system rules. This part of the Act was drafted with securities and payment clearing and settlement systems in mind, not OTC derivatives clearing systems. Consequently, the definitions used are in some respects deficient for application to a derivatives clearing system. Derivatives clearing systems will inevitably become systemically important in Canada, so the Bank must have a clear power to designate them where appropriate and the rules which support the financial stability of such systems must be fully effective. That means, in part, being able to deal quickly with defaulting clearing members.Continue Reading...
Canada proposes amendments to CDIC Act and Payment Clearing and Settlement Act to enhance powers to deal with insolvent deposit taking institutions - New temporary stay on EFCs proposed
Where an insured deposit taking institution (and let’s just call it a bank to make things easy) is subject to a receivership order under the Canada Deposit Insurance Corporation Act (CDIC Act) the government can incorporate a bridge bank to take over the good assets and run the bank until it can be sold. If it does so the usual exemptions from the statutory stays for termination, netting and collateral enforcement for eligible financial contracts (EFCs) are not available if CDIC either undertakes to guarantee the obligations of the insolvent bank or undertakes that the bridge bank will assume those obligations (and CDIC is bound to financially support the bridge bank). Let’s call this the conditional bridge bank stay.
Conditional Bridge Bank Stay Prevails over PCSA Exemption
Those of you who could pass a test on the Canadian ISDA Netting opinion will know that under the current law it is unclear whether the EFC exemption under the Payment Clearing and Settlement Act (PCSA) overrides the conditional bridge bank stay where the parties to the EFC are both financial institutions. The amendments proposed by Bill C-45 will clarify that the conditional bridge bank stay prevails over the PCSA EFC exemption.Continue Reading...
The federal government today introduced Bill C-45, the Jobs and Growth Act, 2012, with the intention of implementing its 2012 budget. Among other things, the Bill contains amendments to the Payment Clearing and Settlement Act to support central clearing of over-the-counter derivatives. As we discussed earlier this year, the CSA released a consultation paper in June proposing that regulators make CCP clearing of eligible OTC derivatives mandatory.
We'll have more on Bill C-45, which is not yet available online, in the coming days.
In our blog post of March 11, 2011, we discussed the proposed repeal by the Alberta Securities Commission of Blanket Order 91-503 and its replacement with Rule 91-505 Over-the-Counter Derivatives. At the time, and in the context of ongoing efforts by the Canadian Securities Administrator to bring the regulation of OTC derivatives within the four corners of securities legislation to comply with G20 commitments, the proposed Rule 91-505 would have resulted in OTC derivatives and commodity futures contracts being considered "futures contracts" under the Securities Act (Alberta). Historically, under BO 91-503, such OTC derivatives and commodity futures contracts were exempted from the definition of “futures contract” and thereby not considered “securities” under the Securities Act.
In the context of the sea change in regulatory philosophy being undertaken by the CSA and reflected in proposed Rule 91-505, only a narrow registration exemption was proposed for OTC physical commodity contracts. The proposed Rule would have abandoned the current concept of prospectus and registration relief for a broad array of OTC transactions and commodity contracts between qualified parties.Continue Reading...
As we discussed earlier this year, the CSA released a consultation paper in June that proposed making central counterparty clearing of eligible OTC derivatives mandatory. While today's release reiterated Canadian regulators' commitment to CCP clearing, the CSA stated that market participants would be able to do so through any CCP that was recognized by Canadian authorities, including global CCPs. According to the CSA, "global CCPs will provide a safe, robust and resilient environment for clearing OTC derivatives" provided that they comply with appropriate international safeguards.
I am pleased to announce that my new colleague, François Gilbert, will be joining this blog as a contributor. François recently joined our firm as Counsel in our Montreal Banking Group after serving as Vice-President, Legal Affairs, Derivatives at the Montreal Exchange. François has broad derivatives and structured finance experience both in Canada and in Europe and while at the Montreal Exchange, played a lead role in the development of the repo clearing platform launched earlier this year by the Canadian Derivatives Clearing Corporation. I look forward to François’ upcoming contributions.
‘A specter is haunting the financial markets – the specter of systemic risk’ (with apologies to Karl Marx)
It wasn’t long after the immediate, frenzied response to the financial crisis that governments and regulators began to turn their minds to the fault lines that had been exposed in the financial system as a whole and to ways in which these could and should be addressed. The phrase which has come to be used to describe these fault lines is ‘systemic risk’.
Systemic risk has been defined as “the threat that a material event (whether an unexpected crisis, the failure of proper risk management, or the result of public policies) would result in the failure of either financial markets or a significant number of financial firms and cause significant harm to the [U.S.] economy because of the interconnections between such markets and firms” (The Financial Services Round Table, Systemic Risk Implementation: Recommendations to the Financial Stability Oversight Council and the Office of Financial Research, September 10, 2010) or, more simply, “the risks that cumulate across institutions, markets and even countries to levels that could have serious effects on the real economy “(Paul Jenkins and Gordon Thiessen, Reducing the Potential for Future Financial Crises: A Framework for Macro-Prudential Policy in Canada, May 2012).Continue Reading...
On June 20th, the Canadian Securities Administrators published Consultation Paper 91-406 describing the CSA Derivatives Committee's proposals relating to central counterparty clearing of over-the-counter derivatives. The consultation paper is the latest in a series of eight papers intended to build on the high-level proposals found in Consultation Paper 91-401 released in November 2010.
Ultimately, the paper proposes that regulators make CCP clearing of eligible OTC derivatives mandatory. Under the Committee's recommendations, CSA members would also develop rules and procedures to determine the eligibility of OTC derivatives contracts for central clearing and procedures for the recognition of CCPs and the approval of CCP rules and policies in regards to the clearing of OTC derivatives contracts.
Comments on the consultation paper are being accepted until September 21, 2012.
On June 6, the International Organization of Securities Commissions (IOSCO) published its Final Report on International Standards for Derivatives Market Intermediary Regulations. The report, which focuses on OTC derivative market intermediaries (DMIs) that deal with non-retail clients and counterparties, makes various recommendations with respect to: (i) the obligations of DMIs; (ii) requirements to manage counterparty risk; and (iii) protecting participants in the OTC derivatives market from unfair, improper or fraudulent practices.
The report sets out its recommendations in very general terms that are not likely to provide much in the way of specific guidance for local regulators. It recommends for example the establishment of minimum standards for the registration or licensing of DMIs. Relevant material information on licensed or registered DMIs should be publically available. According to the recommendations, market authorities should also consider imposing some form of capital or other financial resources requirements for DMIs that are not prudentially regulated.
The report also recommends that DMIs be subject to business conduct standards tailored to the OTC derivatives market. DMIs would also be required to have effective corporate governance frameworks in place, supervisory policies and procedures to manage their OTC derivatives operations, and risk management systems to manage OTC derivatives related business risks.
Ultimately, the report is intended to further G-20 Leaders' objective of reforming the OTC derivatives market to improve transparency, mitigate systemic risk and protect against market abuse. Of more interest to Canadian market participants will be the CSA consultation paper on market intermediary regulations to be published later this summer.
Margaret Grottenthaler -
Last week, the International Swaps and Derivatives Association released a letter it submitted to the Ontario government in support of the Ontario Bar Association's proposal to provide an automatic first priority ranking to financial institutions that have a security interest in cash in financial accounts perfected by control. As I noted in my post of February 14, the OBA proposal would give secured parties holding cash collateral the same degree of legal certainty as to their priority against other creditors that the Securities Transfer Act, 2006 provides to holders of securities as collateral.
In its letter, the ISDA stated that there is no legal assurance of priority in a registration regime. According to the ISDA, however, the certainty and predictability resulting from the proposed changes would "significantly contribute to financial stability in the derivatives markets" in which market participants take part and "enhance their ability to compete in these markets on a more cost-efficient basis." Ontario's Ministry of Consumer Services is accepting input on the issue until May 17.
Margaret Grottenthaler -
As we discussed last month, the Canadian Securities Administrators Derivatives Committee recently released the latest in a series of eight papers intended to build on the high-level proposals found in Consultation Paper 91-401 regarding the regulation of OTC derivatives. Specifically, Consultation Paper 91-405 considers the scope and characteristics of a proposed end-user exemption to address market participants that generally only trade to hedge commercial risks. According to the paper, this limited segment of end-users, not systemically important to the market, should be exempted from most of the proposed regulations concerning OTC derivatives. The CSA are accepting comments on the consultation paper until June 15, 2012.
The Consultation Paper considers various criteria for determining who should qualify for the end user exemption. According to the CSA's proposal, an end user would include participants that: (i) trade for their own account; (ii) are not financial institutions; and (iii) hedge to mitigate commercial risks related to the operation of their business or a related affiliated entity or series of legal entities within that affiliated group. End users that otherwise meet the criteria for the exemption may still be found ineligible for the exemption, however, if they are deemed to be "Large Derivatives Participants" considered key participants in the market or whose default would represent a systemic risk to the market. An upcoming consultation paper on registration is expected to consider the thresholds for Large Derivatives Participants. The Committee also specifically rejected including certain criteria in determining whether a participant qualifies as an end-user, including those based on: (i) trade volume or notional dollar values of trades; (ii) sector specific exceptions; and (iii) standardized contracts and clearing.Continue Reading...
On May 4, the Ontario Securities Commission released a statement regarding a meeting held in Toronto earlier this month and attended by various international regulatory agencies regarding the regulation of OTC derivatives. Various issues surrounding implementation were discussed, including transparency, margin for uncleared derivatives, coordination of clearing mandates, access to data in trade repositories, and cross border clearing house crisis management. Ultimately, the meeting's purpose was to provide a forum for discussion among the regulators as they work toward international harmonization of the regulatory requirements.
In addition to the OSC and Quebec's Autorité des marchés financiers, the meeting included representatives from the Australian Securities and Investments Commission, Brazil's Comissão de Valores Mobiliários, the European Commission and European Securities and Markets Authority, Hong Kong's Securities and Futures Commission, Japan's Financial Services Agency, the Monetary Authority of Singapore, the Swiss Financial Market Supervisory Authority, and the U.S. Commodity Futures Trading Commission and Securities and Exchange Commission.
Last week, Bank of Canada Governor Mark Carney designated the Canadian Derivatives Clearing Service (CDCS), operated by the Canadian Derivatives Clearing Corporation (CDCC), as subject to oversight under Part I of the Payment Clearing and Settlement Act. The designation is effective April 30, 2012. According to the TMX Group, of which the CDCC is part, the designation "reflects the importance of CDCC's fixed income central counterparty facility to the efficient, secure and reliable operation of a Canadian dollar core funding market."
The Canadian Securities Administrators (CSA) last week released Consultation Paper 91-405 Derivatives: End-User Exemption, the latest in a series of eight papers intended to build on the high-level proposals found in Consultation Paper 91-401 released in November 2010.
As is suggested by its title, the paper considers an end-user exemption to OTC derivatives regulation. Ultimately, an end-user exemption is intended to avoid discouraging the use of OTC derivatives by market participants that are not in the business of derivatives trading but that trade in OTC derivatives to mitigate commercial risks related to their business. As such, according to the CSA, an end-user exemption must address this specific segment of the market without undermining the broad objective of increased regulation of OTC derivatives contracts.Continue Reading...
Margaret Grottenthaler -
The Ontario Government released its 2012 budget this afternoon and, in doing so, stated its intention to amend the cash collateral provisions of the Personal Property Securities Act to facilitate the granting of first priority security interests in cash. These changes will not be in this budget bill, but hopefully will be introduced as a bill in the fall.
Specifically, the Government, according to its budget summary, intends to:
propose legislative changes...to Ontario’s personal property security legislation, to make it easier for businesses and financial institutions to provide or obtain a first-priority security interest in cash collateral. If enacted, these changes would support a competitive Ontario business climate, help meet Canada’s international financial reform commitments and mitigate financial system risk related to over-the-counter derivatives.
Presumably this budget statement is intended to clearly convey to the market the government’s commitment to making these important changes. As I discussed in a post last month, the Ontario Personal Property Security Law Sub-Committee of the Ontario Bar Association’s Business Law Section released a proposal earlier this year to amend the PPSA to deal more effectively with cash collateral. While the exact nature of the Government's amendments remain to be seen, the OBA subcommittee's recommended changes will be influential in developing the particular solution to give secured parties holding cash collateral the same degree of legal certainty as to their priority against other creditors that the Securities Transfer Act, 2006 provides to holders of securities as collateral.
On February 17, the Investment Industry Regulatory Organization of Canada (IIROC) republished proposed amendments to its Dealer Member Rules that would extend the current margin treatment on swap offsets to partial swap offsets. The proposals are intended to ensure that the capital requirements reflect the reduced position risk of partial swap offsets on interest rate and total performance swaps. The proposals, initially published in February 2009, now include housekeeping amendments to clarify the minimum margin requirements for unhedged interest rate and total performance swap positions.
Comments are being accepted on the proposed amendments until March 19, 2012. For more information, see IIROC Notice 12-0057.
Margaret Grottenthaler -
As I discussed in my post of January 4, the Ontario Personal Property Security Law Sub-Committee of the Ontario Bar Association’s Business Law Section has been working on a draft proposal over the last year to amend Ontario's personal property security legislation to deal more effectively with cash collateral. The OBA subcommittee's submission has now been finalized. The OBA highlights that the recommended changes will give secured parties holding cash collateral the same degree of legal certainty as to their priority against other creditors that the Securities Transfer Act, 2006 provides to holders of securities as collateral.
Hopefully the government will accept the recommendations and put these changes on the spring legislative agenda.
The Canadian Securities Administrators released a consultation paper today intended to build on earlier proposals to construct a framework for the treatment of market participant collateral in centrally cleared OTC derivatives transactions. Specifically, the paper addresses the segregation of assets put forward as collateral for OTC derivatives transactions cleared through a central counterparty by customers that access the CCP indirectly through clearing members. The paper also addresses the transfer of customer collateral and customer positions upon the default or insolvency of the clearing member of a CCP.
According to the CSA, the paper's recommendations are intended to ensure that "CCPs clearing OTC derivatives possess adequate rules and infrastructure to facilitate the segregation and portability of collateral in a manner that provides market participants with appropriate protections". To that end, the paper recommends, among other things: (i) that clearing members be required to segregate customer collateral from their own proprietary assets and that the Complete Legal Segregation Model (whereby all customers' collateral is permitted to be held on an omnibus basis, but is recorded and attributed by both the CCP and clearing member to each customer based on their collateral advanced) be employed; (ii) that if CCPs or clearing members are permitted to reinvest posted customer collateral, investments should be restricted to instruments with minimal credit, market and liquidity risk; (iii) that CCPs should hold customer collateral at one or more supervised and regulated entities that have robust accounting practices, safekeeping procedures and internal controls; (iv) requiring CCPs to make the segregation and portability arrangements contained in their rules and policies available to the public in a clear and accessible manner; (v) that provincial market regulators enact rules requiring that every OTC derivatives CCP be structured to facilitate the portability of customer positions and collateral; and (vi) that parties to an uncleared OTC derivatives transaction be free to negotiate the level of segregation required for collateral.
The CSA is accepting public comment on the consultation paper, including with respect to the specific questions posed regarding its recommendations, until April 10, 2012.
The paper is one of a series of eight papers building on the high-level proposals found in Consultation Paper 91-401 released in November 2010. For more information, see CSA Consultation Paper 91-404 Derivatives: Segregation and Portability in OTC Derivatives Clearing.
On November 30, 2011, the Quebec Government passed omnibus amendments to financial services legislation under Bill 7, An Act to amend various legislative provisions mainly concerning the financial sector. Bill 7 amends various Quebec statutes regulating the provision of financial services across a broad range of areas such as whistleblower immunity, electronic communications with regulatory authorities, the receivership process for regulated firms, insider trading rules, fraudulent trading and the disclosure of false information to the Autorité des marchés financiers (AMF), Quebec’s financial services regulator.Continue Reading...
On December 16, 2011, Quebec’s financial services regulator, the Autorité des marchés financiers (AMF), tabled proposed amendments to the Derivatives Regulation (Quebec) (QDA) which are intended to implement the provisions of the Derivatives Act (Quebec) governing “qualified persons” (the Proposals) In addition to the derivatives dealer and adviser registration requirements applicable to dealers and advisers in derivatives (the “derivatives registration requirement”), the QDA requires that a person, other than a regulated entity1 who “creates or markets a derivative” must be qualified by the AMF, as prescribed by regulation, before the derivative is offered to the public (the "qualification requirement"). Under an amendment not yet in force, the qualified person must also have the marketing of the derivative authorized by the AMF, as prescribed by regulation (the “authorization requirement”).
As outlined below, the Proposals would, among other changes, significantly increase the disclosure, compliance and reporting requirements applicable to Canadian and foreign intermediaries offering listed derivatives products in the Quebec market to any person, or OTC derivatives to persons other than “accredited counterparties”, unless a discretionary exemption can be obtained. The Proposals are published for a period of 30 days after which the AMF may submit the Proposals to the Minister of Finance for approval, with or without amendments. The AMF is accepting written comments on the Proposals until February 1, 2012.
Market participants conducting derivatives-related activities in the Quebec market should carefully review their product lines, and seek detailed advice as to whether the new qualification/authorization requirements will impact this business and what actions should be taken in contemplation of these new rules.Continue Reading...
Margaret Grottenthaler -
The cash collateral working group drafting subcommittee of the Ontario Personal Property Security Law Sub-Committee of the Ontario Bar Association’s Business Law Section has prepared a draft proposal to amend Ontario personal property security law to deal more effectively with cash collateral. Over the past year the working group circulated a number of draft proposals and this final proposal reflects input from many committee members and others. The proposal is to be considered by the PPSL Committee later this month and if approved (which hopefully it will be) will serve as the basis for a formal submission of the Business Law Section of the OBA to the Ontario Ministry of Consumer Services (with a copy to the Ministry of Finance) early in this year. If the proposal is acceptable to the government, it is hoped that it could be put before the legislature shortly thereafter. Comments on the draft proposal are welcome. For more information, see the background paper on the proposals.
The Quebec National Assembly passed, on November 30, 2011, an Act to amend various legislative provisions mainly concerning the financial sector. As part of that Act, amendments were made to the Derivatives Act (Quebec) in respect of the use of set-off related to cash posted as credit support. We discussed the proposed amendments in a prior post. The provisions are now in force.
CSA release consultation paper on surveillance of OTC derivatives, market conduct rules and enforcement powers
The Canadian Securities Administrators released a consultation paper last week addressing the regulation of OTC derivatives markets. Specifically, the paper makes various recommendations regarding surveillance and monitoring, market conduct and enforcement that are intended to strengthen financial markets and manage specific risks related to OTC derivatives. The paper is one of a series of eight papers building on the high-level proposals found in Consultation Paper 91-401 released in November 2010.
Surveillance and Monitoring
Citing the limited market information currently available to regulators relating to the trading of OTC derivatives, the paper recommends that further study and research be undertaken on the development of a comprehensive surveillance system for monitoring OTC derivatives markets to supplement current market surveillance. According to the report, a comprehensive approach to surveillance and monitoring would include enabling regulator access to trading data and monitoring participant positions.Continue Reading...
Michael Rumball -
Last week, I highlighted regulatory overkill in the U.S. where, together, Congress and the SEC have proposed scorched earth solutions to the issues raised by the financial crisis. Whereas the CSA commendably declined to imitate most of the more extreme U.S. initiatives, they seem to have gone off the rails somewhat in their approach to the exempt market. As was the case south of the border, the Canadian regulators have, in approaching a problem which could have been adequately addressed by a limited and targeted approach, instead mounted a multi-pronged attack. First, they proposed the removal of the existing prospectus exemptions for distributions of securitized products and the introduction of a new securitized product exemption which, although similar to the accredited investor exemption, is intended to exclude retail investors. Second, they would require that issuers deliver an information memorandum to investors which discloses “sufficient information about the securitized product and securitized product transaction to enable a prospectus purchaser to make an informed investment decision”. Finally, they proposed a certification requirement as to no misrepresentation for issuers and underwriters.
It is currently a challenge in Canada for Canadian entities in the derivatives, securities lending and repurchase space to offer a first priority security interest on cash to their counterparties. The Quebec government recently introduced an amendment to the Derivatives Act (Quebec) (the QDA) that, if passed as tabled, will restore confidence in the use of absolute transfer of cash and the related use of contractual set-off or compensation when dealing with cash as credit support for these types of transactions from Quebec counterparties. The amendments also specifically address cash collateral provided to a derivatives clearing agency by its members. We give some background to this issue and then outline the application of the proposed rule.
Cash as credit support for obligations of counterparties to derivatives, securities lending and repurchase transactions has become more and more prevalent over the past numbers of years. ISDA has reported that 80% of collateral for derivatives contracts is in the form of cash. The use of cash collateral will increase in importance as more and more derivatives transactions are cleared by central counterparties.Continue Reading...
On November 9, 2011, a group of Democrat and Republican U.S. senators introduced legislation to create a regulatory framework for an American covered bond market. Specifically, the United States Covered Bond Act sets out the legal context for such a market and clarifies investors’ rights in the event of an issuer’s default.
By way of background, covered bonds are debt products issued by financial institutions and backed by a cover pool of assets, such as high-quality mortgages and public sector loans. Although they operate similarly to asset-backed securities, there is an important difference: if the issuer defaults the investor has preferential claim to the loans. Covered bonds are therefore seen as a safe source of funding for financial institutions.Continue Reading...
On November 10, 2011, the Quebec Minister for Finance introduced an amendment to Bill 7 presently before the Committee on Public Finance of the National Assembly which contemplates an amendment to the Derivatives Act (Quebec). The intent of the proposed rule is to give more clarity and certainty to the effectiveness of a contractual right of set-off in respect of cash given as credit support in connection with agreements including derivatives, securities lending and repurchase agreements (as well as under related master agreements) and dealings between a derivatives clear agency and its members. A more in-depth note will follow next week.
On September 28, the Ontario Securities Commission (OSC) released its decision in the case against Coventree Inc. Coventree, an investment bank specializing in structured finance, was the largest third-party sponsor of asset-backed commercial paper (ABCP) in Canada. OSC staff had alleged, among other things, that Coventree failed to disclose material facts in its prospectus of November 2006, and also failed to disclose material changes regarding subsequent developments in the subprime market.
Ultimately, the OSC found that while Coventree did not breach disclosure requirements with respect to its prospectus, the company did fail to disclose material changes to its business that occurred in early 2007 and during the August 2007 disruption in the ABCP market. Particular points of interest in the decision include the OSC’s discussion of materiality, the use of prospectus disclosure as a baseline for assessing the materiality of future events and the distinction made between a change in the price of a security and a change in the value of a security.Continue Reading...
Whereas the comments on the definition of securitized product and the prospectus disclosure proposals were quite limited and restrained, those on the proposed exempt market rules were both extensive and harshly critical. The general themes were common to most commentators. The proposed rules:
- are an over‑reaction to the failure of the third‑party sponsored ABCP market in Canada;
- focus unnecessarily on risks inherent in high‑risk structures such as those originated under the originate‑to‑distribute model or synthetic structures that either did not or no longer exist in Canada;
- inappropriately apply a one‑size‑fits‑all approach to the traditional securitization market; and
- unfairly differentiates between securitized products and other high risk securities.
Michael Rumball -
On August 31 the comment period in respect of the Canadian Securities Administrators’ Proposed Securitized Product Rules ended. About 30 comment letters were submitted. Over the next couple of weeks I will briefly canvass the comments received on the prospectus disclosure rules and the exempt market rules. Following is a brief discussion of the more general comments.
While almost all commentators concurred with the general principles enunciated by the CSA, a few concluded from the distinct nature of the traditional Canadian securitization market (no originate-to-distribute model; good asset performance) and the nature of the financial crisis that it experienced (liquidity only), that any new rules should leave traditional ABS alone and concentrate solely on those transactions which in fact at the root of the financial turmoil of the past few years. These were identified as those transations utilizing originate‑to‑distribute model and those involving synthetic securities. Although this view has much to recommend it, it does not seem likely that the CSA will abandon the omnibus approach which they have taken. They will probably feel that they have already provided sufficient recognition of the distinct nature of the Canadian market by refraining from applying the more intrusive Dodd‑Frank and Reg AB II proposals, an approach otherwise all but uniformly praised by commentators.
UBS terminated its ISDA Master and FX transactions with Lehman Brothers Inc., was obligated to return about $23 million in collateral, wanted to set-off against that $23 million amounts owing by LBI to UBS affiliates as contemplated by the cross-affiliates set-off provision. Judge Peck said no. These types of clauses are enforceable pre-bankruptcy, but not once a proceeding is commenced. Mutuality is a requirement for post-petition set-off. He said, “Contractual provisions that purport to create synthetic mutuality are not a substitute for the real thing.”
Section 553(a) of the U.S. Bankruptcy Code requires mutuality as a condition of preserving a right of set-off. UBS argued that contractual set-off was an exception to the mutuality requirement. Judge Peck disagreed simply on the basis that the statute did not provide for that exception.
|Philip J. Henderson||Terence W. Doherty|
The Canadian Securities Administrators (CSA) have published the first of eight consultation papers on OTC derivatives reform and, if the industry comment letters on this first paper are anything to judge by, there is a lot of work left to be done by Canadian regulatory authorities to implement Canada’s G-20 commitments on Over-the-Counter Derivatives Regulation. Consultation Paper 91-402 considers the subject of reporting of OTC derivatives trades to trade repositories.
At the G-20 meeting in Pittsburgh in September 2009, Canada committed to require that all OTC derivatives contracts be reported to trade repositories. On June 23, 2011, the CSA Derivatives Committee published Consultation Paper 91-402 – Derivatives: Trade Repositories. It set out a framework for proposed rules for the reporting of OTC derivatives transactions to, and the operation of, trade repositories and sought public comment on a number of issues relating to OTC derivatives transaction reporting and the regulation of trade repositories, including whether a “made-in-Canada” solution is necessary or appropriate. The public comment period closed on September 12, 2011. The CSA received twenty one comment letters from interested parties, many of which were quite lengthy and detailed and raised many questions and considerations for the regulators. The CSA will have much to think about in taking this proposal to the next stage.Continue Reading...
As we discussed in a blog post earlier this summer, the Canadian Securities Administrators released a consultation paper in June that proposed a framework of rules for the reporting of OTC derivatives transactions and the operation of trade repositories.
Earlier this week, the International Swaps and Derivatives Association published a comment letter in response to the CSA's paper. Of particular interest, ISDA comments on some of the challenges in implementing a regime for mandatory reporting to trade repositories. It highlights some of the changes that have been made under the proposed U.S. regulations to facilitate foreign regulator access to U.S. based repositories which make the establishment of a single global trade repository for each asset class of derivatives a more palatable option for regulators. The comment letter also addresses block trade exception rules and the issue of real-time reporting of trade information.
On August 31, the U.S. Securities and Exchange Commission issued a concept release on the use of derivatives by mutual funds and other investment companies registered under the Investment Company Act of 1940. In the release, the SEC noted the "dramatic growth" in the complexity and volume of derivatives investments in recent years and, specifically, funds' increased use of such investments.
The release is ultimately intended to assist the SEC in determining whether further regulation or guidance is needed to improve the regulatory regime with respect to funds' use of derivatives. To that end, the release considers, and requests comment on, such issues as: (i) the costs, benefits and risks of funds' use of derivatives; (ii) restrictions on leverage; (iii) portfolio diversification and concentration; (iv) exposure to securities-related issuers; and (v) the valuation of derivatives.
Comments are being accepted by the SEC for 60 days after the publication of the release in the Federal Register.
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.
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.
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.
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.
Does Re Indalex affect credit support priorities for derivatives and securities financing transactions?
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.
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!Continue Reading...
On May 17, the European Union's Economic and Financial Affairs Council (Ecofin) released a draft proposal intended to increase transparency and ensure coordination on short selling and credit default swaps. Among other things, Ecofin's proposal would create a two-tier disclosure regime for significant net short positions. Specifically, private disclosure to a regulator would be mandated when a person's short position in a company reached 0.2% of issued share capital, while public disclosure would be triggered on reaching a 0.5% threshold.
Short sales, meanwhile, would only be permitted in situations where a person had borrowed the relevant shares, entered into an agreement to borrow the shares or made other arrangements to ensure that settlement could be effected. While similar restrictions are included with respect to sovereign debt, the proposal generally exempts transactions that serve to hedge a long position in debt instruments. The restrictions could also be temporarily suspended where the liquidity of sovereign debt fell below a specific threshold.
Negotiations are now expected to get underway with the European Parliament, which released its own proposal in March, in order to finalize the regulations.
Pursuant to Reg AB II, the Dodd-Frank Act and the rules implementing that Act (the “U.S. Proposals”), U.S. authorities have proposed the most far-reaching substantive and procedural regulations ever applied to the ABS market. In Canada, the CSA have chosen not to propose similar rules at this time but have instead focused almost entirely upon enhanced disclosure; in essence merely bringing Canadian ABS regulations to the standard existing under Reg AB prior to the U.S. Proposals. The implicit rationale for taking this approach is reflected in the third of the general principles which the CSA have indicated have guided them in developing the proposed rules:
“The rules should take into account the particular features of the Canadian securitization markets. In particular, rules should be proportionate to the risks associated with particular types of securitized products available in Canada, and should not unduly restrict investor access to securitized products. Canada experienced significant turmoil in the ABCP market in August 2007. However, for a number of reasons, the Canadian securitization market did not experience a sub-prime mortgage securitization bubble.”Continue Reading...
|Jason Kroft||Doug Bryce|
As briefly discussed in prior blog posts, the securitized product rules published by the Canadian Securities Administrators (CSA) propose to significantly expand the continuous and periodic disclosure regime applicable to issuers of securitized markets in both the public and private markets. This is a significant departure from the current regulatory regime in the exempt market.
While National Instrument 51-102 Continuous Disclosure Requirements will continue to apply, the newly proposed National Instrument 51-106 Continuous Disclosure Requirements for Securitized Products (NI 41-106) would impose a number of new, additional disclosure requirements specific to issuers of any securitized product that is not a “covered bond” or a non-debt security of a “mortgage investment entity”. These disclosure requirements are largely based on the requirements of Reg AB and certain of the proposed rules from the SEC of April, 2010 relating to ABS and other structured finance products and, therefore, for our readers already familiar with the existing disclosure obligations in force under Reg AB the following summary will be strikingly similar to the disclosure regime that has been in effect for a number of years in the U.S.Continue Reading...
Under the proposed securitized product rules disclosure is also required in respect of certain significant counterparties in a transaction. For the most part the rules follow the pattern set out in Reg AB. The most significant feature of the proposed rule is it requires a certain degree of financial disclosure about the counterparties, depending upon whether the counterparty is considered to be, what will be called for present purposes, a “significant counterparty” or a “very significant counterparty”. For significant counterparties, such disclosure is limited to the selected financial information contained in the MD&A disclosure required of reporting issuers plus the same information for any subsequent interim period ended more than 60 days before the date of the prospectus. For a very significant counterparty, however, the financial statements that would have been prescribed under securities legislation had it been the issuer of securities under a prospectus will need to be provided. The calculation of the threshold levels varies according to the counterparty in question.
A “significant obligor” is, generally speaking, an obligor (or group of affiliated obligors) in respect of pool assets representing 10% or more of the asset pool. A very significant obligor is one whose assets represent 20% or more of the pool. In addition, if a significant obligor is an issuer of securitized products and the applicable pool assets are securitized products, then disclosure will need to be made about the underlying securitized products as if the significant obligor were the issuer.Continue Reading...
The Canadian Securities Administrators have recently published for comment proposed rules and rule amendments relating to securitized products. Through this blog we have circulated some of our thoughts on these proposals and will continue to do so over the next several weeks. By so doing we hope to stimulate and encourage a broader and more nuanced consideration and discussion of this significant development in the securitization market
Our ultimate goal is the preparation and submission of a comment letter on the proposals. While we appreciate that a portion of our readership will develop their own responses to the proposals or participate in a response made on their behalf by some sort of formal or informal association, there may be industry participants who, for one reason or another, will not be submitting a formal comment letter. Industry participants interested in consulting with us in the preparation of our comment letter are encouraged to contact us. We would be pleased to discuss our views and hear yours in the process, so that our comment letter represents the views of as broad a cross-section of our readership as is feasible and, should, at the conclusion of such process, you wish to be cited in the letter as supporting the views expressed in it, we would be pleased to do so.
Please feel free to contact any of the following:
Michael Rumball -
As indicated in a previous piece, Item 1 of the proposed CSA rules deals with the various parties to a transaction and requires clear identification of each role that they play and the specific functions and responsibilities being performed in connection with each role. In the following, we continue to discuss issues raised by certain of the required disclosure elements relating to the parties to a securitized products transaction.
In Reg AB, disclosure is required in respect of “any provisions or arrangements included to address any one or more of the following issues:
(a) Whether any security interests granted in connection with the transaction are perfected, maintained and enforced.
(b) Whether declaration of bankruptcy, receivership or similar proceeding with respect to the issuing entity can occur.
(c) Whether in the event of a bankruptcy, receivership or similar proceeding with respect to the sponsor, originator, depositor or other seller of the pool assets, the issuing entity’s assets will become part of the bankruptcy estate or subject to the bankruptcy control of a third party.
(d) Whether in the event of a bankruptcy, receivership or similar proceeding with respect to the issuing entity, the issuing entity’s assets will become subject to the bankruptcy control of a third party.”Continue Reading...
Michael Rumball -
Proposed Form 41-103F specifies the supplementary prospectus disclosure requirements for distributions of securitized products. Item 1 deals with the various parties to a transaction and requires clear identification of each role that they play and the specific functions and responsibilities being performed in connection with each role.
The roles specified as being material and, where applicable, the related definitions are as follows:
- Sponsor: the person who organizes and initiates a securitized products transaction by selling or transferring assets, either directly or indirectly, to the issuer.
- Depositor: a person or company in a securitized product transaction who receives or produces pool assets from the sponsor and transfers or sells the pool assets to an issuer of securitized products.
- Arranger: a person or company that arranges and structures a securitized product transaction, but does not sell or transfer assets, direct or indirectly, to the issuer of the securitized products, and in the absence of evidence to the contrary, includes the underwriters for a distribution of securitized products.
- Originator: a person or company that originates receivables, loans or other financial assets that are pool assets.
- Servicer: a person or company responsible for the management or collection of pool assets or making allocations or payment distributions to a holder of a securitized product, that does not include a trust of an issuer of securitized products or for the securitized product that makes allocations or payment distributions.
- Any other party with a material role including, without limitation, a custodian, intermediate transferor or liquidity provider in the secondary market.
On February 28, the Alberta Securities Commission proposed the repeal of Blanket Order 91-503, which currently exempts most over-the-counter derivatives from the definition of "futures contract" under the Alberta Securities Act and, thus, exempts such OTC derivatives from regulation as "securities".
The ASC would replace Blanket Order 91-503 with Rule 91-505 Over-the-Counter-Derivatives, which is intended to restore the ASC's authority to regulate OTC derivatives transactions as futures contract transactions under the Act. The proposed Rule 91-505, however, would recognize the fact that such transactions are generally confined to large institutional entities and exempt distributions of a futures contract from the prospectus requirement under the Act.
However, an exemption from the dealer registration requirement would only apply to OTC physical commodity contracts. The Rule defines OTC physical commodity contract to mean a futures contract that (i) is not an exchange contract; (ii) contains an obligation to make or take future delivery of a commodity other than cash or a currency; and (iii) does not allow for cash settlement in place of physical delivery.
Unless addressed in the context of further harmonization of dealer registration requirements or otherwise, as it currently stands, the proposal replaces the broader dealer registration exemption with a narrow exemption limited to OTC physical commodity contracts. As such, under the proposal, there would no longer be an exemption for qualified parties.
The ASC is accepting comments on its proposal until April 29, 2011. For more information, see ASC Staff Notice 91-703 Over-the-Counter Derivatives.
The Alberta Court of Appeal has just released its decision on the reference made by the Alberta government regarding the federal government's plan to implement the proposed federal Canadian Securities Act. According to the Alberta Court of Appeal, the proposed Act exceeds the constitutional authority of the Parliament of Canada as not falling within the banking or trade and commerce power.
The Alberta Court of Appeal's decision in one of among three references currently pending on the issue. The Department of Finance released the proposed Canadian Securities Act in May 2010 and the Canadian Securities Transition Office has since been working on a plan for transitioning securities regulation to a federal regulator. The Quebec Court of Appeal held hearings on the constitutionality of the federal Act in January, while the Supreme Court of Canada is scheduled to hold hearings on the issue on April 13 and 14, 2011.
Bank of America N.A. v. Lehman Brothers Holdings Inc. and Lehman Brothers Special Financing Inc. 439 B.R. 811 (2010) (U.S. Bankr. Ct., S.D.N.Y.)
I do love the food for thought these Lehman Brothers bankruptcy cases provide. While they often turn (as this one does) on specific provisions of U.S. bankruptcy or state law, they do remind us of the importance of stating very clearly what is or is not permitted, especially when it comes to set-off. Although the case considers the Bankruptcy Code netting safe-harbour and security interests in cash collateral accounts, it is in essence a case about the availability of common law set-off in the context of cash collateral arrangements.
As you may know by now, BOA was found by Judge Peck to have breached the bankruptcy stay by setting-off an amount LBHI owed to it as guarantor of terminated swap contracts entered into between BOA and LBSFI against cash collateral credited to an LBHI account at BOA. The main question was whether BOA was entitled to exercise that right of set-off under state law against this particular account. In Canada we do not have any stay on the exercise of set-off rights in a bankruptcy proceeding, so the issue relating to the stay would not arise here. However, the main issue of whether a right of set-off was available might.Continue Reading...
As we discussed in December 2009, the Saskatchewan Financial Services Commission, Securities Division issued General Order 91-907 in November of that year exempting over-the-counter (OTC) derivatives trading among qualified parties from the registration and prospectus requirements under the Saskatchewan Securities Act, 1988.
The General Order and Companion Policy have now been amended to include an exemption where: (i) the OTC derivative is a contract for the production of natural gas or the purchase and sale of natural gas; and (ii) each party to the contract is engaged in the production of natural gas or the purchase or sale of natural gas.
As part of their 2009 commitment to move forward with cap-and-trade legislation, the Province of Manitoba is inviting public comment on the structure of any future cap-and-trade regime. Manitoba joined the Western Climate Initiative (WCI) in 2007 and is proposing to use the WCI as a framework for their cap-and-trade system and to integrate their market with that of other WCI members. The most recent Environment Canada data indicates that Manitoba's greenhouse gas emissions come from a large number of small sources, mainly in the agricultural, transportation and stationary combustion source categories Stationary combustion sources include commercial, institutional and residential heating, manufacturing and construction sources, among others. For more information, or to submit comments, please go to the Government of Manitoba Climate Change & Green Initiatives website.
The Alternative Investment Management Association (AIMA) recently released a couple of position papers setting out its views on proposals emanating from the European Commission dealing with derivatives and credit default swaps. The first considers the key provisions of the EC's Proposal for a Regulation on OTC derivatives, central counterparties and trade repositories, while the second considers the EC's Proposal for a Regulation on Short Selling and certain aspects of Credit Default Swaps.
AIMA also recently responded to the U.S. CFTC's proposals on the process for reviewing swaps for mandatory clearing by stating that, while as many swaps as possible should be subject to clearing requirements, caution should be taken to avoid subjecting unsuitable swaps to clearing by including them within wide groupings of swaps.
On December 20, 2010, the Basel Committee released a consultative paper, Capitalisation of bank exposures to central counterparties, which gives interested stakeholders an opportunity to comment on proposed regulatory capital adequacy rules relative to exposures to CCPs.
Under its proposals, the BIS would largely defer to the Committee on Payment and Settlement Systems (the CPSS) and the Technical Committee of IOSCO with respect to what constitutes a qualifying CCP. It notes that their review is continuing. Interestingly, the proposals would increase the capital charges on exposures to CCPs over that applicable under Basel ll. The theory would appear to be that capital exposures on OTC derivatives exposures are increasing more and that therefore the G20 mandate to encourage clearing through CCPs is still met.
The capital charge would be based on the sum of the value of posted collateral, mark-to-market exposures and potential future exposures. However, there would be no capital charge "where collateral posted by a bank in connection with trades with a compliant CCP has been segregated and is remote from the bankruptcy of the firm". There is also a rule which in very limited circumstances would extend the benefit of the CCP capital treatment to indirect clearers.
The Basel Committee is accepting comments on the proposed rules text until February 4, 2011. The new rules are intended to be finalized by September 2011 and implemented effective January 1, 2013.
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.Continue Reading...
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.
As expected, the government of Ontario has now introduced proposed amendments to the Securities Act (text not yet available) that would allow the Ontario Securities Commission to develop a regulatory framework to govern over-the-counter (OTC) derivatives. According to the government's economic update released this afternoon, the proposed framework would be consistent with the federal government's plan to implement a national securities regulator.
In addition to tackling OTC derivatives regulation, the proposed amendments would also "provide for regulatory oversight of credit rating agencies and strengthen the oversight of alternative trading systems".
According to various media outlets, including the Globe and Mail and the Financial Post, the Ontario government is expected to introduce proposals later today relating to the regulation of derivatives. The expected move may raise the question of how Ontario's proposals will fit with those of other jurisdictions. Watch for more details once the proposals are released this afternoon.
The bridge institution provisions of the Canada Deposit Insurance Corporation Act (CDIC Act), as they relate to the exemption from the termination, netting and collateral enforcement safe-harbour that otherwise applies in a CDIC receivership of a deposit insured federal institution, came into force on November 1. As we discussed in July, the amendments were part of federal Bill C-9, the Jobs and Economic Growth Act.
Omnibus financial legislation introduced by the Quebec government on November 10, 2010 includes technical amendments to Quebec's derivatives legislation, as well as provisions intended to improve the oversight of persons authorized to market a derivative and to strengthen the process of authorization of the marketing of the product.
The technical amendments would include expanding the list of instruments included in the definition of "derivative" under the Derivatives Act (Quebec) (the QDA) to cover contracts for differences (CFDs) specifically.
Bill 128 would also incorporate more detailed requirements to provisions under the QDA that are not yet in force governing persons qualified under the QDA to create or market a derivative. These new provisions include requirements that a qualified person maintain a corporate and organizational structure and adequate human, financial and technological resources to enable it to operate effectively and ensure the security and reliability of its transactions and activities. A qualified person would also be required to have adequate business policies and procedures and appropriate governance practices, including, in particular, with respect to the independence of its directors and the auditing of its financial statements. The amendments also clarify that a qualified person would be required to register as a dealer or offer derivatives to the public through a dealer.
On October 22nd, 2010, the government of British Columbia released draft cap and trade regulations for public consultation. The proposed regulations establish the rules for emissions trading and offset projects in the province and are part of the province's commitment to the Western Climate Initiative. The public consultation period is open until December 6, 2010.
Appeal of UK case on effect of Events of Default on netting and payment obligations dismissed on consent
If you were waiting to hear what the English Court of Appeal had to say about the lower court decision in Marine Trade S.A. v. Pioneer Freight Futures Co. Ltd. you’ll be disappointed, as the appeal was dismissed by consent of the parties on October 22, 2010. Given the reasonableness of the lower court decision, however, that’s just fine by me. If you missed it when it was decided in October 2009 (or maybe you can’t remember if you read it), here’s a short description of the decision.
Marine Trade and Pioneer were parties to a Forward Freight Agreement master agreement (under which they entered into numerous cash settled CFDs based on a published freight rate index). The parties were both buyer and seller under the various CFDs. The FAA agreements incorporate terms from the ISDA Master and the case is in large part about the rights to suspend and net payments under section 2 of the ISDA Master.
The monthly settlement amounts due in January 2009 were about US$7m owing by Pioneer to Marine Trade and US $12m owing by Marine Trade to Pioneer.Continue Reading...
The Canadian Securities Administrators yesterday published a consultation paper on over-the-counter derivatives regulation in Canada intended to address "some of the deficiencies that have become apparent in the OTC derivatives market". Specifically, the consultation paper provides background on the need for regulation and provides a number of specific proposals. Among other things, the report recommends and requests comments on:
- mandatory central clearing of OTC derivatives that are determined to be appropriate for clearing and capable of being cleared, such as standardized derivatives. This is the approach taken by the Dodd-Frank Act;
- amending provincial securities legislation to mandate the reporting of all derivatives trades by Canadian counterparties to a trade repository. The report makes no recommendation regarding a specific time requirement for reporting but states that real-time reporting will ultimately be required;
- in the near term, having provincial regulators obtain regulatory authority to mandate electronic trading of OTC derivative products. The report states, however, that further study will be necessary to determine "the eventual scope of a regulatory mandate";
- in accordance with the recommendations of the Basel II Accord, imposing capital requirements proportionate to the risks that an entity assumes;
- establishing exemptions for defined categories of end-users that use OTC derivatives to hedge a variety of risks. The report states, however, that it would not be appropriate to provide an exemption for speculative derivative trades or an exemption to financial entities; and
- having provincial regulators obtain authority to conduct surveillance on OTC derivatives markets, develop robust market conduct standards and obtain authority to investigate and enforce against abusive practices.
The report also states that further analysis is required before making a recommendation regarding the segregation of capital in the OTC derivatives context.
The Committee, which also set out a number of specific questions pertaining to its recommendations, is accepting comments on the consultation paper until January 14, 2011. According to the Committee, it will move forward by continuing to develop legislative proposals and beginning to draft proposed rules.
On October 21, Chairman Gary Gensler of the U.S. Commodity Futures Trading Commission gave a speech to the Institute of International Bankers in which he discussed the regulation of swaps. Specifically, Mr. Gensler described the recent amendments to the Commodity Exchange Act (care of s. 722(d) of the Dodd-Frank Act) to extend the CFTC's jurisdiction to all international activities that "have a direct and significant connection with activities in, or effect on, commerce of the United States" or that "contravene such rules or regulations as the Commission may prescribe or promulgate as are necessary or appropriate to prevent the evasion of any provision". As Mr. Gensler characterized the amendments, "if your bank is doing business here in the U.S., offering swaps to U.S. counterparties, you may want to take a close look at the statute."
The Hiring Incentives to Restore Employment Act (or HIRE Act) has now come into effect in the United States and it will likely be relevant to Canadian participants in the OTC derivatives and securities lending areas.
By way of background, the HIRE Act added a new U.S. withholding tax provision for certain equity-related swaps, sale-repurchase transactions and securities lending transactions. The HIRE Act applies to dividend equivalent payments made on or after September 14, 2010. Dividend equivalent payments include payments that are contingent on, or determined by reference to, U.S.-source dividends in sale-repurchase and securities lending transactions, including certain equity swap transactions where a non-U.S. counterparty buys or sells the underlying U.S. security from or to its counterparty. After March 18, 2012, cross-border dividend equivalent payments made under all equity swap transactions will be treated as U.S.-source dividend income, unless the U.S. Department of the Treasury issues regulations exempting any particular equity–related swap from its application. As a result, any U.S. source dividend equivalent payment received or paid by Canadian parties, for example, generally will be subject to U.S. withholding tax even if there is no U.S. counterparty to the transaction. The withholding tax is imposed on the “gross amount” of any dividend-equivalent payment used in computing any net amount paid to the non-U.S. counterparty in connection with the transaction. The U.S. withholding tax generally will be imposed at a 30% rate, unless the applicable withholding rate is reduced under the terms of an income tax treaty and proper documentary evidence is timely provided to the appropriate counterparty.Continue Reading...
AMF Staff issued a notice last week further extending the term of the temporary exemption provided under its February 1, 2009 blanket decision No. 2009-PDG-0007 (the Blanket Order). The Blanket Order provides relief from the derivatives dealer and adviser registration requirements and the derivatives qualification rules under the Derivatives Act (Quebec) for specified derivatives activities carried out solely with “accredited investors” (as defined under National Instrument 45-106 Prospectus and Registration Exemptions). The original exemption had been extended to September 28, 2010 in a March 26, 2010 AMF Staff notice. Last week's notice further extends the Blanket Order for an indefinite term and states Staff's intention to publish any amendments to the relief "at an appropriate time".
Nova Scotia's Securities Transfer Act, which gained Royal Assent back in May, has now been proclaimed into law. According to Minister of Service Nova Scotia and Municipal Relations Ramona Jennex, the legislation "brings greater legal certainties around the holding, transferring and pledging of securities."
By our count, that leaves PEI and the Yukon as the only Canadian jurisdictions left without any similar legislation. For links the legislation of the respective provinces and territories, see our Resources page.
Citing the need to increase transparency and reduce counterparty and operational risk, the European Commission today released new proposals to regulate the OTC derivatives market. Among other things, the proposals would require trades in OTC derivatives in the EU to be reported to central data centres (trade repositories) accessible to regulators. A new European Securities and Markets Authority would be responsible for registering and monitoring trade repositories, while standard OTC derivatives would have to be cleared through central counterparties. The EC expects the proposals to be promulgated by the end of 2011.
The TMX Group Inc. issued a paper last week providing its perspective on issues deriving from the financial crisis and discussing how the core competencies of a combined regulated exchange and clearing house are designed to meet G-20 objectives respecting improving over-the-counter (OTC) derivatives markets. While the paper focuses primarily on the TMX Group's competencies applicable to OTC and exchange-traded derivatives, it does provide an interesting viewpoint on how Canada should respond to prevent similar crises from recurring.
According to the TMX,
[t]he financial crisis was global, and international organizations are adopting recommendations and commitments to address key global issues. However, legislators, regulators and supervisors are provincial and national, and it will be these authorities, working with market operators and market participants who will be responsible for both the implementation and the success of these measures.
Specifically, the paper recommends to Canadian regulators that they utilize domestic facilities with international linkages to provide regulatory oversight of OTC markets, such as trading, clearing, data warehousing and regulatory services. According to the TMX, such a regulatory scheme would satisfy the G-20 requirements of strengthening prudential oversight, improving risk management, increasing transparency, promoting market integrity, protecting against market abuse, mitigating systemic risk and reinforcing international cooperation.
On August 30, the U.S. Commodity Futures Trading Commission (CFTC) released final rules respecting off-exchange retail foreign currency transactions. The rules, which include requirements regarding registration, disclosure, recordkeeping, financial reporting, minimum capital and other operational standards, among other things, take effect on October 18.
Under Quebec’s derivatives legislation, the Chief Compliance Officer (CCO) of a derivatives portfolio manager is required to have at least three years of relevant derivatives experience and to have passed all required IIROC exams with respect to derivatives for an officer of a derivatives dealer (the Derivatives Proficiency Requirements) in addition to satisfying the proficiency requirements of National Instrument 31-103 Registration Requirements and Exemptions.
On July 27, 2010, the Autorité des marchés financiers, Quebec's financial services regulator, issued a blanket decision which exempts the CCO of a derivatives portfolio manager from the Derivatives Proficiency Requirements provided the firm has designated an Officer Responsible for Derivatives Operations who meets prescribed proficiency requirements that are detailed in the blanket decision with respect to options, futures and swap-related products.
The decision is in effect as of July 30, 2010.
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.
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.
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...
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.
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.
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.
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)
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."
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,  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.Continue Reading...
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.)Continue Reading...
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.
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.)Continue Reading...
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 committee endorses practices with respect to cash credit support for collateral providers located in Canada
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.
On May 25, the Committee of European Securities Regulators (CESR) released a statement describing the "intensifying close co-ordination of its members' market surveillance efforts"in light of recent market volatility in euro denominated debt instruments. The CESR also stated that it is of the view that structural reforms should be "rapidly introduced to enhance the transparency, organisation and functioning" of the bond and CDS markets, which are currently largely over-the-counter. According to the CESR, it is also working on measures to enhance the "organisation and integrity of OTC derivatives markets".
The proposed federal Securities Act tabled by the federal government on May 26 establishes a framework for the regulation of exchange-traded and over-the-counter derivatives markets and their participants. Don’t expect to see a new regime too soon though. This legislation has not yet been introduced as a Bill but only laid before Parliament on a Ways and Means motion. The draft legislation has been referred to the Supreme Court of Canada to obtain a ruling as to whether it is within the legislative competence of the federal Parliament and will not be introduced until that question is resolved. Provinces are given the choice to opt into the federal scheme as well. Many provinces (not including Quebec and Alberta) have taken part in the process and would be expected to opt into the national scheme.Continue Reading...
The Committee on Payment and Settlement Systems (CPSS) and the Technical Committee of the International Organization of Securities Commissions (IOSCO) released two reports yesterday regarding OTC derivatives. The first, Guidance on the application of the 2004 CPSS-IOSCO Recommendations for Central Counterparties to OTC derivatives CCPs, provides guidance to central counterparties clearing OTC derivatives in applying the Technical Committee's 2004 recommendations. Considerations for trade repositories in OTC derivatives markets, meanwhile, provides a set of considerations for trade repositories in OTC derivatives markets and relevant authorities.
The Investment Industry Regulatory Organization of Canada (IIROC) recently released its Strategic Plan for 2010-2012. The plan describes IIROC's vision and values and sets out the challenges it faces in fulfilling its mandate. Specifically, the plan discusses the following goals:
- Promoting a culture of compliance and high standards among those subject to IIROC's jurisdiction. This will include a reorganization of IIROC's rules to enhance comprehension, providing compliance examination findings and recommendations to members and undertaking periodic industry-wide compliance audits.
- Delivering effective, efficient and expert regulation. Projects that IIROC will undertake in pursuit of this goal include the implementation of a risk-based methodology for registration and completing its framework approach to IFRS.
- Maintaining market integrity by actively monitoring market structure developments and market-related events. IIROC states that it will reduce timelines to complete enforcement investigations and bring proceedings, clarify roles and relationships in order to strengthen the client/adviser relationship and continue to develop its policies respecting OTC and debt markets.
- Ensuring that it discharges its responsibilities in a cost-effective manner, which will include the implementation of an equitable Dealer and Marketplace Member fee model.
- Maintaining a confident and well-trained staff.
The International Monetary Fund (IMF) recently released a chapter of its semiannual Global Financial Stability Report dealing with over-the-counter derivatives. Specifically, the chapter considers the role of central counterparties in making OTC derivatives markets "safer and sounder" and reducing counterparty risk.
The New Brunswick Securities Commission (NBSC) yesterday published a proposed amendment 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 published yesterday would modify 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 change is being proposed in light of inquiries from industry and should clarify the NBSC's intention that the exemption only applies where both parties are qualified parties acting as principal.
The NBSC is accepting comments on the proposed amendment until June 7, 2010. For more information on LR 91-501, see our post of March 25 respecting a derivatives FAQ published by the NBSC.
Canada introduces amendments to clarify provisions on assignments of eligible financial contracts to bridge institutions
In March 2009, Canada’s federal Parliament passed amendments to the financial institution restructuring provisions of the Canada Deposit Insurance Corporation Act (CDIC Act) to allow CDIC as receiver of a federal member institution to assign assets and liabilities of the institution, including financial contracts, to a solvent bridge institution.
A bridge institution is a financial institution that would be established when CDIC is appointed receiver of an institution to take over some or all of the assets and liabilities of the institution for a temporary period, presumably to effect a sale of the business. These provisions came into force, except for one specific provision that qualified the safe-harbour from stays on termination, set-off and collateral enforcement for eligible financial contracts (the “EFC safe-harbour”). In the Budget Bill, 2010 (Bill C-9), the government has introduced a further clarification to this exemption from the EFC safe-harbour which will clear the way for bringing the section into effect. This Bill received first reading in the House of Commons on March 29, 2010.Continue Reading...
The Ontario Securities Commission (OSC) today published a revised Statement of Priorities for the financial year ending March 31, 2011. The OSC initially released a draft Statement of Priorities in December 2009, and the revised version includes changes made in consideration of public comments received. Specifically, the changes to the draft publication include (i) a reference to the creation of an independent panel focusing on investor issues; and (ii) a new initiative to signal the OSC's intention to direct more resources to the regulation of OTC derivatives.
The Autorité des marchés financiers (the "AMF", Quebec’s financial services regulator) announced today that the temporary exemption provided under its February 1, 2009 blanket decision from the derivatives dealer and adviser registration requirements under the Derivatives Act (Quebec) (the "Act") for specified derivatives activities carried out solely with “accredited investors” (as defined under National Instrument 45-106 Prospectus and Registration Exemptions ("NI 45-106"), will remain available until September 28, 2010. Prior to this announcement, the temporary exemption had been set to expire on March 27, 2010. The exemption remains available subject to the following conditions:
- the derivatives activities must be carried out solely with “accredited investors” in accordance with the conditions set forth in NI 45-106 (including the filing of a report under Part 6); and
- the activities must relate only to certain specified categories of derivatives, including:
- an option or a negotiable futures contract pertaining to securities, or a Treasury bond futures contract;
- an option on a commodity futures contract or financial instrument futures contract; or
- commodities futures contracts, financial futures contracts, currencies futures contracts and stock indices futures contracts.
The AMF also announced that the corresponding exemption from the derivatives qualification rules under the Act will continue to remain available for the time being and that the AMF will advise market participants of any changes to this exemption.
As we reported back in January, the New Brunswick Securities Commission published answers to frequently asked questions regarding Local Rule 91-501 Derivatives. Last week, the NBSC published a revised notice expanding on its answer regarding whether the rule applies to spot foreign exchange contracts. Specifically, the revised notice states that "LR 91-501 does not apply to spot foreign exchange transactions involving the purchase or sale of a currency (i.e. transactions such as changing money at a currency exchange or withdrawing cash at a foreign ATM)." Whether other spot foreign exchange transactions are subject to LR 91-501, however, remains unclear, as the NBSC's use of "i.e." raises questions as to whether the example provided was intended to be comprehensive.
The Provincial/Territorial Council of Ministers of Securities Regulation (Council) issued its 2009 Progress Report yesterday outlining the various regulatory activities undertaken last year across Canadian jurisdictions. The issues considered in the Council's Progress Report include the federal transition to a single securities regulator, the upcoming changeover to IFRS and the introduction in various jurisdictions of harmonized securities transfer legislation.
The Progress Report also provides a preview of initiatives that the Council anticipates the CSA will undertake during the next year, namely, a new rule dealing with oversight of credit rating organizations, the development of a harmonized regulatory framework for derivatives, including OTC derivatives, hedge fund regulation and executive compensation requirements.
On February 11, 2010, the Canada Revenue Agency (the "CRA") released GST/HST Notice No. 250 (the "CRA Notice") in response to the proposal to change the definition of "financial services" in the Excise Tax Act (the "Act") announced in a News Release and Backgrounder issued by the Department of Finance on December 14, 2009 (the "Backgrounder"). The Department of Finance stated that such proposal is intended to "clarify" and confirm the government's policy intent that certain services such as management, administration, marketing and promotional services do not constitute financial services and are therefore subject to GST/HST.
In the CRA Notice, the CRA states that the proposals to change the legislation "reaffirm the longstanding policy intent and provide certainty with respect to the application of GST/HST". Surprisingly, the CRA uses the CRA Notice to completely reverse a number of its own published positions with respect to what constitutes an exempt service of "arranging for" a financial service. Financial institutions and businesses dealing with financial institutions should carefully examine whether or not they are affected by these policy changes, and whether services previously considered exempt from GST/HST are now taxable.Continue Reading...
On January 7, the New Brunswick Securities Commission (NBSC) published NBSC Notice 91-701 to respond to certain frequently asked questions on NBSC Local Rule 91-501 Derivatives (the Rule). As discussed in our previous update dated December 14, 2009, the Rule imposes registration and risk disclosure requirements in respect of trades in “derivatives” as defined in the Rule, other than trades among qualified parties.
The notice clarifies that a qualified party that engages in a derivatives transaction is responsible for determining whether the other party is also a qualified party. To do so, it may rely on factual statements made by the other party provided that it does not have reasonable grounds to believe that the statements are false. The qualified party is also responsible for determining whether the exemptions under the Rule are applicable based on the facts supplied by the other party and should retain all documentation relating to its determination.
The notice is somewhat ambiguous in response to the question of whether the Rule applies to principal protected notes (PPNs) and refers readers to CSA Staff Notices 46-303 and 46-304.In characterizing PPNs as investment products that offer an investor potential returns “based on the performance of an underlying investment”, it appears that NBSC staff is suggesting that they would fall within the definition of “derivative” under the Rule. However, the notice does clarify that the Rule does not apply to spot foreign exchange contracts and that the registration exemptions contained in the Rule may be relied on by insurance companies, loan and trust companies, investment dealers, portfolio managers, investment fund managers (and certain persons authorized to act as such or carry out similar functions), and certain registered individuals (all as referred to in paragraphs (d), (f). (j) and (k) of the definition of “qualified party”) when acting as agent or trustee for a fully-managed account.
The notice also provides a six-month transition period for financial sector participants having to implement new derivatives-related compliance measures, giving them until March 28, 2010 to phase in compliance obligations arising from the Rule.
Saskatchewan securities division releases registration and prospectus exemption for qualified persons entering into OTC derivatives
The Saskatchewan Securities Act, 1988 (the Saskatchewan Act) includes within its definition of "security" a futures contract or option that is not an exchange contract. Given the wording of the definition, there has been uncertainty as to whether OTC forwards and other OTC derivatives transactions would fall within this category and consequently be subject to the registration and prospectus requirements of the Saskatchewan Act. The issue has now been addressed by the Saskatchewan Financial Services Commission, Securities Division. On November 26, 2009, it issued General Order 91-907 exempting over-the-counter (OTC) derivatives trading among qualified parties from the registration and prospectus requirements under the Saskatchewan Act. The Companion Policy to the General Order states that the Act's definition of "security" includes futures contracts and options that are not exchange contracts and, thus, parties that currently enter into futures contracts or options are subject to the registration and prospectus requirements of the Saskatchewan Act.Continue Reading...
The British Columbia Securities Commission today published a Companion Policy to Blanket Order 91-502 Short Term Foreign Exchange Transactions to clarify when a foreign exchange contract may be considered a "security" for the purposes of the British Columbia Securities Act.
The Companion Policy states that under s. 1(1) of the Securities Act, the following three components of the definition of "security" could describe a forex contract:
(a) a document, instrument or writing commonly known as a security;
(l) an investment contract;
(n) an instrument that is a futures contract or an option but is not an exchange contract.Continue Reading...
On September 18, 2009, a number of amendments to Canada's Bankruptcy and Insolvency Act (BIA) and Companies Creditors Arrangement Act (CCAA) came into force. The amendments were passed in 2005 and 2007 but, aside from a few provisions that became effective in July 2008, the amendments sat dormant, awaiting proclamation into force. Pursuant to Order in Council P.C. 2009-1207, almost all of these amendments have now been brought into force. Some of these provisions will be of interest to participants in the securitization market.Continue Reading...
In response to numerous inquiries, the Ontario Securities Commission (OSC) issued a notice on October 27 outlining OSC Staff's view on the applicability of securities laws to offerings of Contracts for Difference (CFDs), foreign exchange contracts (FX contracts) and similar OTC derivative products. While the notice focused on CFDs, the guidance is intended to apply generally to FX contracts and OTC derivatives as well. Further, it is OSC Staff's intention that the interim guidance provided will remain effective until such time that a harmonized approach to the regulation of OTC derivatives is developed by the Canadian Securities Administrators and/or Ontario introduces derivatives legislation.
According to the notice, OSC Staff consider CFDs to be securities and, as such, CFD providers offering such products to Ontario investors must comply with Ontario's registration and prospectus requirements absent statutory exemptions or exemptive relief. In reaching its conclusion, OSC Staff considered the Supreme Court of Canada decision in Pacific Coast Coin Exchange v. Ontario (Securities Commission),  2 S.C.R. 112 and the subsequent jurisprudence. In particular, OSC Staff referred to the parallels between the facts of Pacific Coast "and the current trend towards offerings of CFDs to investors through the internet."Continue Reading...
On September 17, 2009, the Business Development Bank of Canada (BDC) announced revised parameters to the $12 billion CSCF that was established earlier this year as part of the Government of Canada's Extraordinary Financing Framework. Uncommitted CSCF funds will be offered on a "first-come, first-served" basis until March 31, 2010 with the stated intent of providing continued support for participants in the auto and equipment financing sectors. Based on information from a price-discovery process that BDC undertook in August and on industry feedback, the facility is now being offered to participants at 150 basis points above Government of Canada funding costs. It is anticipated that the new pricing may result in renewed interest in the facility which to date has remained untapped.
OSC grants relief allowing international dealer to distribute CFDs via an IIROC member affiliate without filing prospectus
On October 16th, the Ontario Securities Commission (OSC)granted relief on an application by CMC Markets U.K. and its Canadian affiliate allowing CMC Canada to distribute contracts for difference and foreign exchange contracts (collectively, CFDs) to Ontario investors without having to file a prospectus. CFDs are derivative products that "allow clients to obtain exposure to markets and instruments that may not be available directly, or may not be available in a cost-effective manner."
In granting the relief, the OSC stated that the requested relief would "substantially harmonize the Commission's position on the offering of CFDs to investors in Ontario with how those products are offered to investors in Quebec" under the Derivatives Act (Quebec). Under the QDA, such products may be offered through the distribution of a standardized risk disclosure document rather than a prospectus. The OSC noted that it had previously recognized that similar disclosure may be better suited for such products than a prospectus.
Thus, the requested relief was granted provided that, among other things, CMC U.K. remains registered with the U.K. Financial Services Authority, CMC Canada maintains its registration as an investment dealer with the OSC and as a member of Investment Industry Regulatory Organization of Canada and all distributions are conducted pursuant to the rules of the QDA and the Autorité des marchés financiers.
The relief is valid for the earliest of four years, the suspension of the ability of the applicants to offer CFDs in the U.K. or Quebec and the coming into force in Ontario of legislation regarding the distribution of OTC derivatives
Supreme Court of Canada decision reveals risk of characterization of cash collateral arrangements as creating security interests
Collateral arrangement relying on set-off held to create a security interest and therefore subject to federal government's priorities for unremitted income tax and employment insurance at-source deductions
Caisse populaire Desjardins de l'Est de Drummond v. Canada, 2009 SCC 29
On June 19, 2009 the Supreme Court of Canada released its decision in Caisse populaire Desjardins de l'Est de Drummond v. Canada. The issue was whether an agreement between a lender and borrower with respect to set-off against a term deposit gave rise to a "security interest" within the meaning of s. 224(1.3) of the federal Income Tax Act (ITA). The majority of the court held that it did. Consequently, the lender's right to set-off its term deposit obligation against the borrower's loan obligation was subject to the statutory priority of the federal government with respect to employment insurance (EI) remit¬tances and income tax at-source deductions under s. 227(4.1) of the ITA and s. 86(2.1) of the Employment Insurance Act (EIA).
Recent rulemaking across Canada and proposed rules in Quebec (if adopted) will have a significant impact on the cross-border trading activities of non-Canadian dealers, advisers, futures commission merchants (FCMs) and commodity-trading advisers (CTAs) with respect to commodity futures contracts and commodity futures options (futures) as well as security options.
On July 17, 2009, the Canadian Securities Administrators (CSA) published their final proposal for National Instrument 31-103 - Registration Requirements and Exemptions (31-103). Subject to governmental and other local approval requirements, 31-103 will come into force on September 28, 2009 (the Implementation Date). While the regulation of futures activities was not the focus of 31-103, the new securities registration rules will have some impact on the regulation of futures activities in Canada. For further information and a complete breakdown of the new regime, please refer to Stikeman Elliott’s Registration Reform in Canada: The Finish Line is Here.Continue Reading...
Amendments to the Quebec Derivatives Regulation announced - Proposed exemption for exchange-traded derivatives offered primarily outside Quebec
Comment period open until August 31, 2009
On July 17, 2009, the Canadian Securities Administrators (the CSA) published their final proposal for National Instrument 31-103 - Registration Requirements and Exemptions (31-103). Subject to governmental and other local approval requirements, 31-103 will come into force on September 28, 2009 (the Implementation Date). The adoption of 31-103 in Quebec can be expected to accelerate the further implementation of the Quebec Derivatives Act (QDA) which came into force in Quebec on February 1, 2009 and governs trading and advisory activities relating to all forms of derivatives.
On July 31, 2009, as part of this implementation process, the Autorité des marchés financiers (AMF), Quebec's financial services regulator, published a proposed Regulation to amend the Derivatives Regulation (the Proposed Regulation). The Proposed Regulation incorporates by reference various registration-related instruments and material provisions of 31-103 and sets out an important registration exemption for non-Quebec dealers and advisers in exchange-traded derivatives offered primarily outside Quebec provided they limit their activities to "accredited counterparties".Continue Reading...
Amendments to the Quebec Derivatives Regulation announced - Proposed exemption for exchange-traded derivatives offered primarily outside Quebec
On July 17, 2009, the Canadian Securities Administrators (the CSA) published their final proposal for National Instrument 31-103 - Registration Requirements and Exemptions (31-103). Subject to governmental and other local approval requirements, 31-103 will come into force on September 28, 2009 (the Implementation Date). The adoption of 31-103 in Quebec can be expected to accelerate the further implementation of the Quebec Derivatives Act (QDA) which came into force in Quebec on February 1, 2009 and governs trading and advisory activities relating to all forms of derivatives.Continue Reading...
In Decision No. 2009-PDG-0064 in the matter of CMC Markets UK Plc (June 16, 2009), the Quebec Autorité des marchés financiers (AMF) granted a temporary exemption to a London-based firm regulated by the UK Financial Services Authority from requirements under section 82 of the Derivatives Act (Quebec) (QDA) in connection with the offering of contracts for differences (CFDs) in Quebec. This is one of the first exemption decisions granted by the AMF since the coming into force of the QDA on February 1, 2009. The QDA regulates all activities with respect to OTC and exchanges traded-derivatives carried on in Quebec.Continue Reading...
The Budget Implementation Act, 2009 (Canada) S.C. 2009, c.2, passed on March 12, 2009, introduced amendments to the financial institution restructuring provisions of the Canada Deposit Insurance Corporation Act (CDIC Act) that will modify the stay exemption for close-out netting and collateral enforcement rights under eligible financial contracts (EFCs) with CDIC member institutions. These provisions are not yet in force and will come into effect by Order-in-Council.Continue Reading...
Earlier this year Abitibi-Consolidated Inc. (Abitibi) and various related entities proposed to enter into an arrangement with certain classes of its creditors relying on the plan of arrangement provisions in the Canada Business Corporations Act (CBCA). It is unusual to propose a corporate plan with respect to a company's debt. The CBCA plan of arrangement provision is not fundamentally an insolvency law. The procedure is most often used to restructure securityholder relationships within solvent companies and that is the primary intention. Restructurings involving insolvent entities are typically done under the Companies' Creditors Arrangement Act (CCAA). However, on rare occasions, the corporate proceeding is used by corporations that are insolvent. While the CBCA requires that a corporation be solvent to use the proceeding, courts have "finessed" this requirement by holding that it is satisfied as long as one of the applicant companies is solvent (even where the applicant is often a corporation newly established to take part in the plan) and the insolvent companies will emerge solvent from the plan.Continue Reading...
Triangular (or cross-affiliate) set-off has been at issue recently in the Companies' Creditors Arrangements Act (Canada) (CCAA) proceedings with respect to SemCAMS ULC (SemCAMS) (and certain other of its Canadian affiliates). In one application, SemCAMS successfully challenged Nexen Marketing's (Nexen) attempts to effect triangular set-off where Nexen lacked a contractual right to do so.Continue Reading...
As a follow-up to the recent announcement by the Quebec Government on the coming into force of the new Derivatives Act (the “QDA” or “Act”) on February 1, 2009, the Autorité des marchés financiers (the “AMF”, Quebec’s financial services regulator) issued a press release on January 26, 2009 to announce a series of important transitional measures. The coming-into-force documents published by the AMF also include three policy statements relating to the definition of “accredited counterparties”, the characterization of “hybrid instruments” and self-certification of rules made by “recognized regulated entities”.
The QDA is the first comprehensive standalone derivatives legislation to be adopted in Canada. The Act regulates both over-the-counter (OTC) and exchange-traded derivatives, subject to certain carve outs for OTC derivatives activities involving “accredited counterparties” (the “OTC Derivatives Exemption”) and in other cases to be specified by regulation.
Noting that the QDA is principles-based legislation, the AMF commented in its press release that the legislation “specifies obligations of results and transfers the responsibility for establishing the most effective means of assuming such obligations to market participants and other regulated entities”. Exactly what standard is implied by this reference to “obligations of results” in the context of these principles-based rules is not yet clear.Continue Reading...
The Expert Panel on Securities Regulation released its Final Report and Recommendations entitled "Creating an Advantage in Global Capital Markets" on January 12, 2009. The Expert Panel was established by the federal Minister of Finance to provide advice and recommendations on various areas of securities regulation. Its key recommendations include establishment of a single securities regulator to administer a national securities act, establishment of an independent adjudicative tribunal, advancing a more principles-based approach to securities regulation and modernizing Canada's approach to the regulation of derivatives. Along with its Final Report the Expert Panel also published a draft national Securities Act to serve as a starting point for the development of national legislation to govern Canadian capital markets.Continue Reading...
The Quebec Government has proclaimed the Derivatives Act (QDA) in force as of February 1, 2009. The Act had received royal assent on June 20, 2008.
The QDA is the first comprehensive standalone derivatives legislation to be adopted in Canada. The Act regulates both over-the-counter (OTC) and exchange-traded derivatives, subject to certain carve outs for OTC derivatives activities involving "accredited counterparties" and in other cases to be specified by regulation. An earlier article regarding the adoption of the QDA appears in the July 2008 issue of Stikeman Elliott's Structured Finance Update.
On November 14, 2008, the President’s Working Group on Financial Markets (PWG) announced a number of initiatives intended to provide regulatory oversight and prudent management of the over-the-counter derivatives market in the U.S. These initiatives include the implementation of central counterparty services for credit default swaps and the signing of a Memorandum of Understanding between the Federal Reserve, SEC and the Commodity Futures Trading Commission with respect to information sharing and consultation regarding CDS central counterparties issues. The PWG also announced a set of policy objectives to “guide efforts to address challenges associated with OTC derivatives.”
IIROC has approved amendments to Dealer Member Rules 100.2, 100.2(j) – Interest Rate Swaps and 100.2(k) – Total Performance Swaps in order to clarify the margin requirements for swaps where the counterparty is a regulated entity. The amendments were approved by the IDA Board of Directors on December 12, 2007 and took effect September 8, 2008.
An Act respecting the transfer of securities and the establishment of security entitlements (the Quebec STA) received Royal Assent on June 20, 2008 and will come into force on January 1, 2009. The adopted legislation differs from Bill 47 as initially introduced in the National Assembly and upon which we commented in December 2007.
The Quebec STA seeks to implement the principles of the Uniform Securities Transfer Act, while harmonizing Québec's rules with the securities transfer legislation of other provinces. The concepts found in the Quebec STA follow the model of the USTA and Article 8 of the U.S. Uniform Commercial Code (including the companion provisions of UCC Article 9). The Quebec STA introduces or formalizes into Quebec law concepts such as adverse claims, securities intermediaries, security entitlements, entitlement holders, securities accounts, financial assets, control and protected purchasers.
Important developments for Canadian and cross-border derivatives activities in the Québec market
Québec's new Derivatives Act (the Act) received royal assent on June 20, 2008 and will come into force on dates to be set by the Government. The Act will regulate both over-the-counter (OTC) and exchange-traded derivatives in standalone legislation, subject to certain carve outs for OTC derivatives activities involving "accredited counterparties" and in other cases to be specified by regulation.
Some of the highlights of the new legislation are noted below. Since the key provisions of the Act cross-reference regulations that have yet to be published, it is still too early to determine the exact scope and application of the Act and its potential impact on the various segments of the Canadian and cross-border derivatives market. It is expected that the Act and companion regulations (once published) will enter into force at the same time over the course of the next few months.Continue Reading...
On May 30, 2008, the Montréal Climate Exchange (MCeX) officially launched the trading of a futures contract on Canada carbon dioxide equivalent (CO2e) units.
As was noted by MCeX chairman Luc Bertrand at the official launch ceremony, "the listing of the MCeX futures contract is a 'first' and it makes the Montréal Climate Exchange the first regulated environmental market in Canada." The MCeX is a joint venture between the TMX Group's Montréal Exchange (MX) (the Canadian derivatives exchange) and the Chicago Climate Exchange® (CCX), which operates the world's first greenhouse gas (GHG) emissions reduction and trading system. The launch of the MCeX is intended, in the words of CCX Chairman and Founder Richard Sandor, to position Canada "at the forefront of environmental finance and integrated emissions trading."Continue Reading...
On April 11, 2008, the Alberta Securities Commission (ASC) issued Blanket Order 91-503, "Over-The-Counter Derivatives Transactions and Commodity Contracts". BO 91-503 replaced the previous Blanket Order 91-502 with effect from March 31, 2008.
The ASC found that the use of clearing agencies has become increasingly more prevalent with respect to the clearing of OTC derivative transactions since BO 91-502 was issued in August 2000. The fact that BO 91-502 could not be relied upon to provide an exemption to the prospectus and registration requirements of Alberta's Securities Act for OTC derivative transactions cleared through the facilities of a clearing agency was therefore an increasing problem for the industry. ("Clearing agency" is defined in the Securities Act as an entity that acts as an intermediary in paying funds or delivering securities (or both), that provides centralized facilities through which trades in securities or exchange contracts are cleared, or that provides centralized facilities as a depository of securities).
A legislative proposal to establish a new Derivatives Act was tabled by the Québec Minister of Finance on April 9, 2008. Bill 77 follows the publication in August 2007 by the Autorité des marchés financiers (Québec's financial markets regulator) of a proposed framework for the regulation of the derivatives markets in Québec and an earlier concept paper in May 2006, both of which attracted detailed comments by Canadian and foreign stakeholders in the industry. The proposed Québec Derivatives Act would regulate both over-the-counter (OTC) and exchange-traded derivatives in standalone legislation, subject to certain carve outs for OTC derivatives activities involving designated "accredited counterparties".
The stated purpose of the Act is to "foster honest, fair, efficient and transparent derivatives markets and to protect the public from unfair, improper and fraudulent practices and market manipulation." In the Québec Minister of Finance's April 9, 2008 press release, Minister Monique Jérôme-Forget stated that the legislation is intended to "provide the industry with a clear legislative framework that meets its needs for legal security, flexibility and efficiency. It will afford users of derivatives the protection they need, helping make Québec one of the best places in the world to trade derivatives".Continue Reading...
Wide range of products, including margin loans, now covered
In the Spring of 2007, Canada's Parliament amended several federal insolvency statutes so as to transfer the definition of the class of protected contracts known as "eligible financial contracts" (EFCs) from the federal insolvency statutes themselves to their respective associated regulations. On November 15, the Treasury Board approved the finalized regulations to the Bankruptcy and Insolvency Act, the Winding-up and Restructuring Act, the Companies' Creditors Arrangement Act, and the Canada Deposit Insurance Corporation Act. The changes were effective November 17, 2007. The long-awaited EFC definition includes the following types of agreement:Continue Reading...
As reported in Stikeman Elliott's April 12, 2007 Structured Finance Update, it was announced in the March 2007 Federal Budget that an agreement in principle had been reached between Canada and the U.S. that would update the Canada-U.S. tax treaty with the effect of eliminating withholding tax on interest paid on arm's length cross-border financings between Canada and the U.S. It was also announced in the Federal Budget that the Income Tax Act would be amended to eliminate Canadian non-resident withholding tax on interest paid by Canadian residents to all arm's length foreign residents, regardless of their country of residence. The amendments to the Income Tax Act were intended to be conditional on the implementation of the changes to the Canada-U.S. tax treaty and were initially proposed to be effective once the arm's length exemption in the Canada-U.S. tax treaty came into effect. The measures announced in the Federal Budget were welcome news as the proposed changes with respect to Canadian non-resident withholding tax will facilitate a Canadian resident's access to foreign debt financing without the structural limitations currently imposed by the so-called "5/25 exemption" contained in the Income Tax Act.Continue Reading...