Canada: Canadian Securities Administrators Propose New Securitized Products Rules

Last Updated: February 6 2014
Article by Simon R. Fitzpatrick, Marc J. MacMullin, Dean Masse, Michael K. McConnell and Dirk Rueter

Most Read Contributor in Canada, September 2018

The Canadian Securities Administrators (CSA) published a comprehensive set of proposed new rules with respect to securitized products in April 2011 (2011 Proposals), but in a notice dated January 23, 2014 the CSA indicated that they do not intend to proceed with the aspects of the 2011 Proposals relating to: (a) prospectus and continuous disclosure requirements; (b) restricting the prospectus-exempt distribution of securitized products to a class of highly-sophisticated investors; and (c) the prospectus-exempt distribution of securitized products with a maturity of one year or more. The rationale given by the CSA for this change of direction was based on their conclusion that Canadian securitization activity currently does not raise systemic risk or investor protection concerns that warrant the type of comprehensive regulatory intervention contemplated by the 2011 Proposals.

Instead, the CSA has published for a second comment period a more targeted set of proposed amendments (Revised Proposals) that incorporate and modify certain aspects of the 2011 Proposals relating to the prospectus-exempt distribution of short-term securitized products (i.e. having a maturity of less than one year), primarily asset backed commercial paper (ABCP). Any comments on the Revised Proposals must be provided in writing by April 23, 2014. Citing the ABCP market disruption of 2007, the CSA premises the new approach on their belief that ABCP raises greater investor protection and systemic risk concerns than other types of commercial paper by virtue of its complexity, the frequent maturity mismatch between the underlying assets and the ABCP, and the systemic risk introduced by the maturity and liquidity transformations inherent in ABCP structures. The Revised Proposals would amend National Instrument 45-106 by making the following exemptions unavailable for the distribution of ABCP: (a) the short-term debt prospectus exemption; (b) the private issuer prospectus exemption; (c) the family, close friends and close business associates exemptions; (d) the founder, control person and family exemption; and (e) the offering memorandum exemption.

New Prospectus Exemption

A new prospectus exemption for short-term securitized products would be introduced under the Revised Proposals requiring that the short-term securitized product satisfy a number of conditions including:

Two credit ratings. A conduit that issues ABCP would be required to have credit ratings from at least two designated rating organizations (the existing short term debt exemption requires only one such rating). Each credit rating must be at or above a prescribed minimum level, which is higher than the minimum level proposed for other types of commercial paper. The exemption would be unavailable for ABCP if any of the issuing conduit's credit ratings are under review by the relevant designated rating organization and it would be reasonable for the conduit to expect that the review would result in the credit rating being withdrawn or downgraded below the prescribed minimum level.

Prescribed liquidity support. Proposed liquidity support requirements with respect to short-term securitized products include:

  • a "global-style" liquidity facility so that the liquidity provider is required to provide funding to pay in full maturing ABCP in all circumstances other than the bankruptcy or insolvency of the conduit or default of the underlying assets;
  • the liquidity provider be a deposit-taking institution that is regulated by OSFI or a similar provincial regulatory authority; and
  • the liquidity provider have long-term credit ratings that are at or above a prescribed minimum level from at least two designated rating organizations.

Permitted assets. A conduit relying on the exemption would have to contractually agree that its asset pool would consist only of traditional asset classes such as bonds, leases, mortgages, loans, royalties and receivables. The conduit could also hold securities of other conduits subject to the same asset class restrictions. If an asset pool includes credit derivatives or highly structured or leveraged credit products, short-term securitized products could still be issued in reliance on other prospectus exemptions such as the accredited investor exemption or the $150,000 minimum investment exemption. However, such exemptions would include resale conditions and may require the filing of an exempt distribution report (the current form of exempt distribution report would be amended to add securitization conduits as an industry classification).

Mandatory information memorandum. A conduit issuing ABCP would be required to prepare and make available to investors an information memorandum in a prescribed form prior to the investor purchasing the ABCP. Information required to be disclosed by the conduit in its information memorandum would include, among other things, the names of material sellers and servicers. See "Information Memorandum" below.

Contractual obligation to provide continuous disclosure. A conduit would be required to contractually agree with investors to provide a prescribed monthly disclosure report, to be prepared and made available within 30 days of month end, and a timely disclosure report which would be required in the event of either a change to the information in the most recent monthly disclosure report, or an event occurring that would reasonably be expected to materially affect either payments on that class of ABCP or performance of the assets in the asset pool. See "Continuous Disclosure" below.

Risk retention and incentive and interest alignment disclosure. Disclosure would be required in the monthly disclosure report about whether and how an ABCP structure aligns incentives of the securitization transaction parties with the interests of the investor.

Investor and regulator access to disclosure. The information memorandum, monthly disclosure reports and timely disclosure reports must be made reasonably available to investors and securities regulators (which may be satisfied by a conduit posting such documents on a website maintained by or on its behalf). In recognition that ABCP transactions occur in the exempt market, there would be no requirement that these disclosure documents be filed with securities regulators. However, conduits would be required to undertake to deliver the monthly disclosure reports and timely disclosure reports to securities regulators on request.

Information Memorandum

Significant Party Disclosure. One of the key disclosure requirements for the form of information memorandum in the Revised Proposals (Form 45-106F7) is disclosure of the identity of each "significant party" to a securitization transaction. The definition of "significant party" in Form 45-106F7 includes "principal obligors" and each person that performs or will perform certain activities if that role is "material". Such activities include: (a) organizing or initiating the transfer of a material portion of an asset pool to the conduit, (b) originating assets in an asset pool of the conduit, and (c) collecting payments generated by one or more assets in an asset pool of the conduit. "Principal obligor" is defined in Form 45-106F7 as an obligor of assets in an asset pool if the assets in respect of which the person is an obligor generate one-third or more of the aggregate cash flow generated by all assets in an asset pool of a conduit.

The definition of "significant party", as well as several other items in Form 45-106F7, provide that disclosure is only required of "material" information. The instructions to Form 45-106F7 provide that information is "material" if knowledge of it could reasonably be expected to affect a reasonable investor's decision whether to buy, sell or hold a short-term securitized product. This materiality description is similar to the description of materiality in the form requirements for management's discussion and analysis and annual information forms.

Eligible Assets. Form 45-106F7 requires disclosure of the material investment guidelines and underwriting criteria applied or to be applied to the assets that will form the conduit's asset pool, including those regarding: (a) the types of assets that a conduit may acquire; (b) concentration or correlation limits, including limits in respect of industry classification, geographic regions and obligors; (c) the credit quality of assets that will form the asset pool of the conduit; and (d) the originators or intermediaries from which assets may be obtained. The due diligence or verification procedures that will be applied to the assets that will form each asset pool of the conduit are also to be described.

Material Agreements. Form 45-106F7 requires a description of the terms of each material agreement to which a significant party is a party, except to the extent previously disclosed in an information memorandum or a monthly disclosure report for the conduit. Disclosure is specifically required on any material contractual provisions designed to protect a holder of ABCP from material deterioration in respect of either or both of: (a) the performance of an asset pool, and (b) the credit quality or performance of a significant party.

Asset Pool. If on or prior to the date of the information memorandum the conduit has acquired an asset pool, Form 45-106F7 requires inclusion in the information memorandum, or as an annex thereto, of certain asset level information regarding the asset pool, such as: (a) a diagram disclosing the aggregate composition of the conduit's asset pool broken down to disclose: (i) each asset type, expressed as a dollar amount and a percentage of the total asset pool; (ii) the industry of the originator of the assets, expressed as a dollar amount and a percentage of the total asset pool; and (iii) the amount of assets obtained from each originator, expressed as a percentage of the total asset pool; and (b) the identity of each principal obligor and the percentage of the asset pool in respect of which the person is the principal obligor.

No Misrepresentation. Form 45-106F7 provides that each information memorandum is to state that "This information memorandum does not contain a misrepresentation". However, the Revised Proposals do not introduce any additional statutory rights of action for a misrepresentation in an information memorandum beyond those that may already exist under the laws of an applicable jurisdiction.

Continuous Disclosure

In an attempt to increase and standardize ongoing disclosure to investors and regulators, the Revised Proposals require conduits to prepare both a monthly disclosure report (MDR) and a timely disclosure report (TDR). The prescribed requirements for the MDR are set out in Form 45-106F8, which is to be current as at each month end and is to be prepared and made available to investors within 30 days of each month end. The TDR is to be delivered to investors within two days upon the conduit becoming aware of material changes to information that was included in the most recently delivered MDR or upon the occurrence of an event that could reasonably be expected to "significantly" affect either (a) the payments on the short term securitized product; or (b) the performance of the assets in the asset pool. The Revised Proposals require that the conduit contractually agree with its investors by way of an undertaking or other agreement that it will provide such continuous disclosure reports for so long as the particular securitized product being sold remains outstanding.

Monthly Disclosure Report

As noted above, the prescribed form and content of the MDR is set out in Form 45-106F8, and requires the conduit to disclose, among other things, (a) the identity of each significant party to the securitization transaction; (b) structure diagrams of the securitization transaction or series of securitization transactions in which the conduit acquires an interest in an asset pool in connection with issuing ABCP and the related cash flows; (c) composition of the asset pool including a breakdown of: (i) each asset type, (ii) industry of the originator; (iii) identity of principal obligor, (iv) concentration risks, (v) use of hedging arrangements; and (vi) a description of any securities of other conduits owned by the conduit and the securitization program issuing them; (d) changes to the asset pool from the prior period; (e) program compliance and termination events, including the insolvency or bankruptcy of the conduit and material amortization or program events of default, and draws on liquidity facilities; (f) a summary of each securitization transaction entered into by the conduit, including: (i) number of obligors; (ii) number of originators and the industry in which each of the originators primarily does business; (iii) a description of assets; (iv) available credit enhancement; and (v) alignment of interest and conflicts of interest of the significant parties to such transaction, including: (A) whether any significant party has been required by law or undertaking to retain an economic interest in the credit risk of the assets and (B) if no economic interest was retained, the reasons why no risk was retained.

Timely Disclosure Report

The CSA has proposed that conduits provide "material information" to investors by delivery of a TDR relating to a change from information that was included in the most recently provided MDR or an event that the conduit would reasonably be expected to "significantly" effect either (a) the payment on the short term securitized product; or (b) the performance of the assets in the asset pool. As with Form 45-106F7, information is "material" if knowledge of it could reasonably be expected to affect a reasonable investor's decision whether to buy, sell or hold a short term securitized product.

The Revised Proposals do not provide a prescribed form for the TDR. However, the Revised Proposals do provide that the TDR must describe the nature and substance of the change or event including how the change or event effects any payment on the short-term securitized product and the investment performance of the conduit's asset pool.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions