ARTICLE
24 October 2012

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

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Where an insured deposit taking institution is subject to a receivership order under the CDIC Act the government can incorporate a bridge bank to take over the good assets and run the bank until it can be sold.
Canada Finance and Banking

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. 

New temporary unconditional stay

There is also a significant change to the bridge bank stay. When an order incorporating a bridge institution is made, there will be a short unconditional stay imposed on EFCs by a new section (s.39.15(7.01)). This stay – let's call it the temporary bridge bank stay-  is not conditional on CDIC making the undertakings described above. The period of the stay is from the time of the order incorporating the bridge institution until 5 pm on the following business day. So, if an order is made Friday morning it would last until 5 pm the following Monday. As with the conditional bridge bank stay, the temporary stay prevents a party from relying on the following triggers of its right to terminate, net or realize on collateral - (a) the bank's insolvency, (b) the making of the order appointing CDIC as receiver of the bank or incorporating the bridge bank, or (c) the EFC being assigned or assumed by the bridge bank. It does not prevent relying on other default events, such as failures to deliver credit support or payment defaults. Essentially the provision gives CDIC some time to determine which EFCs it wants to assign or stay termination of. (And as with the existing conditional bridge bank stay, no cherry-picking is permitted.)

Changes to the Conditional Bridge Bank Stay

The current conditional bridge bank stay does not allow a counterparty to rely on the making of the receivership order or the assignment of the EFCs to a bridge bank as triggers for termination, netting and collateral enforcement. This will be amended to include the same triggers that apply to the temporary stay. Again, performance defaults such as failure to provide margin can still be relied on. 

The amendments will add provisions similar to those in other insolvency statutes to the effect that provisions of an agreement are of no force and effect if they permit actions contrary to the temporary bridge bank stay or conditional bridge bank stay or if they provide that the insolvent bank or bridge bank ceases to have the rights to deal with assets that it would otherwise have upon the triggering events.  

Clearing House Exception from the Temporary Stay

Importantly certain clearing houses will not be subject to the temporary bridge bank stay. New subjection 39.15(7.02) will provide that it does not apply to an EFC between the bank and a clearing house (as defined in s.2 of the PCSA) that provides clearing and settlement services for a PCSA section 4 designated clearing and settlement system (which are those systems deemed systemically important) or that is a securities and derivatives' clearing house as defined in section 13.1(3) of the PCSA (CDCC, CDS, ICE Clear Canada and those designated as such by the Minister of Finance). (See our related blog item on the changes to the PCSA.)

As under the current law, clearing houses (designated or not) are not exempt from the conditional bridge bank stay. So, unless the clearing house manages to port or close out transactions during the temporary stay period, a stay will kick in. It is not clear how these provisions will work in practice for clearing relationships. There are clearly issues that will have to be worked out in advance between CDIC, the members and the clearers (e.g. how the bridge bank could become a member assuming the EFCs are assigned to the bridge bank, and if they are not how the insolvent bank can continue as member when it may no longer meet membership criteria, what the margin requirements for the member will be, etc.).   

Stays Continue if Insolvent Bank Wound-up

Under the current Act any of the section 39.15 stays end when the restructuring is complete or a liquidator is appointed for the bank under the Winding-up and Restructuring Act (s.39.18). New section 39.18(2) will provide that certain provisions continue to be effective in these circumstances, including the temporary bridge bank stay (and the clearing house exemption to it), the effectiveness of the contractual provisions allowing termination, netting and collateral enforcement on the triggering events noted above and the power of CDIC to assign to a bridge institution. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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