Canada: Quebec Is First Province To Propose Cash Collateral Regime

As previously reported in our post of November 28, 2014, the Quebec Minister of Finance presented Bill 28 to the National Assembly on November 26, 2014. The proposed legislation includes provisions in respect of cash collateral, and would make Quebec the first Canadian province to propose legislative modifications in order to facilitate cash collateral. The purpose of this post is to provide some background as to the necessity of these new provisions as well as an overview of the specific rules before proceeding to give examples of application.


Historically, it has been a challenge for Canadian entities to offer a first priority security interest on cash to their counterparties. By contrast, in the United States, a debtor may grant a first priority security interest over cash in a deposit account by way of control pursuant to the provisions of Article 9 of the Uniform Commercial Code. The same is not currently the case in Canada for cash not in a securities account. If a secured party is granted a security interest in cash, the traditional view is that valid security under the laws of the jurisdiction of the grantor's location needs to be obtained, the security needs to be perfected by registration, a search of the relevant register needs to be undertaken and estoppels, subordinations or waivers from competing or prior ranking creditors need to be obtained. This may be a costly and time-consuming exercise and ultimately may not be successful.

As an alternative to a security interest in cash, a practice developed in Canada to transfer cash absolutely (not by way of a security interest) and create a debtor/creditor relationship and an express right of set-off. The majority decision of the Supreme Court of Canada in Caisse populaire Desjardins de l'Est de Drummond v. Canada, a federal income tax case out of Quebec, cast doubt on the effectiveness of the use of contractual compensation.

One of the possible avenues to explore in attempting to use cash as collateral has been to have the same in a securities account and use the provisions of the securities transfer legislation in the applicable provinces to create security over a security entitlement. Unfortunately, it is not always possible or obvious that cash in fact gives rise to a security entitlement in a securities account.

At the end of 2011, the Quebec Minister for Finance introduced amendments to the Quebec Derivatives Act and the Quebec Securities Act in order to reassure the derivatives, foreign exchange, securities lending and repurchase markets, as well as clearing agencies, in respect of the effectiveness of contractual set-off without necessity for registration in order to "perfect" the arrangement.

There has been some discussion in Canada, particularly in Ontario, concerning proposed legislative changes to provide for cash collateral. The Quebec legislation is the first to move in this direction. The basic conceptual building block for the provisions in respect of cash collateral is the notion of control, similar to that applicable to granting a first priority security over a security entitlement. The provisions also compare favorably in important aspects to the security-interest regime applicable to deposit accounts under Article 9 of the Uniform Commercial Code.

Overview of Provisions

The proposals in respect of cash collateral are set out in modifications to the Civil Code of Québec.

The new provisions adopt a broad definition of "pecuniary claim" (a monetary claim), essentially being the obligation of a debtor to reimburse, return or restore an amount of money or make any other payment in respect of an amount of money. Notable exclusions from the definition are claims represented by a negotiable instrument, presumably since the Bills of Exchange Act (Canada) has a special regime in respect of taking security on negotiable instruments subject to such legislation. Another important exclusion exists for claims that are securities or security entitlements, since the Quebec securities transfer legislation has its own particular regime.

In order to obtain a valid and perfected pledge over a monetary claim, the secured party must obtain control. No registration is necessary. It is important to distinguish between obtaining control of a monetary claim that the grantor of the pledge has against its secured party and a monetary claim that the grantor has against a third party. 

In order to obtain control of a monetary claim that the grantor has against its secured party, the grantor simply has to give written consent to the effect that such claim secures performance of an obligation towards the creditor. This may be an obligation of the grantor itself or of a third party.

It is not all monetary claims that a grantor has against a third party for which the grantor can give control to a creditor. Claims in regards to the credit balance of a financial account (to a large degree similar to the deposit accounts under the UCC) as well as other claims in regards to an amount of money deposited with a third-party to secure performance of an obligation to the secured party are the only ones available for such type of control. In these circumstances, the secured party, the grantor of the security and the third party need to enter into a control agreement in writing whereby, without the additional consent of the grantor, the third party will comply with the secured party's instructions in respect of the credit balance or such amount of money. All of these notions are very similar to those applicable to control agreements used in connection with obtaining control of a security entitlement in a securities account.

One key part of the cash collateral proposal provisions is to grant a super priority to secured parties with control. Hence, once a secured party obtains control, it has a security on the relevant monetary claim which security has priority over any other movable hypothec on the same claim, regardless of when the other hypothec is published. However, the debtor of the monetary claim that is also a secured party having control will have priority over other secured parties having control. Other than such secured party, as amongst secured parties having control, it is the moment of obtaining control that determines priority. This will mean that secured parties will not need to do searches nor obtain waivers or subordinations of prior registered hypothecs.

One of the proposed transitional rules for Bill 28 contemplates that arrangements currently in force that would comply with the cash collateral provisions if such provisions had been in force at the relevant time will benefit from the rules once they come into force.

Examples of application.1

Some important examples of the application of the proposed provisions follow.

ISDA Credit Support Annexes

Under the New York credit support annex frequently used in connection with International Swaps and Derivatives Association, Inc. derivatives documentation, there is a possibility of designating credit support as eligible collateral or other eligible support. A practice developed in Canada to elect cash as other eligible support only and to modify such credit support annex in order to create a debtor-creditor relationship in respect of such cash and then rely on contractual set-off not a security interest in cash.

It will now be possible to include cash as eligible collateral and rely on the provisions in the New York credit support annex for a pledgor to indicate that all cash transferred or, more properly, the obligation of the secured party to return an equivalent amount of the cash received as collateral, is subject to a security interest. Cash would include cash collateral in any freely tradable currency. In these circumstances, it would be anticipated that cash would not be designated as other eligible support and it would not be necessary to modify such credit support annex in order to provide for a debtor-creditor relationship and contractual set-off. It will be clear, once the provisions are adopted, that using the New York credit support annex and designating cash as eligible collateral is an arrangement that will give a super priority to the secured party in the claim that the pledgor has against it for the return of the equivalent amount of the cash provided as collateral.

Alternatively, the parties could use or continue to use the UK transfer annex or the New York credit support annex modified for cash to be other eligible support with the provisions for the debtor-creditor relationship and contractual set-off. Bill 28 does not preclude this approach. In fact, for these credit support annexes currently in place, Bill 28 acknowledges that they continue to be effective.

Deposits for Rental Payments

It is common in commercial real estate leases for a tenant to have to post a deposit as security for rental payments. Once the cash collateral provisions come into force, a tenant will be able to consent to such deposit being collateral subject to a security for its obligations to pay rent. Such would constitute a pledge by the tenant on the landlord's obligation to repay the deposit in accordance with the lease provisions. A landlord would have a first priority security on such rights.

As a general observation, the cash collateral provisions could be used in any commercial situation where a deposit is to be given as security for an obligation.

Asset Backed Lending

We assume for purposes of this example that the asset backed lender is not the deposit-taking institution. In these circumstances, it is common that the asset backed lender will require that its debtor obtain, from the deposit-taking institution where the debtor holds its accounts, a blocked account agreement. By virtue of the blocked account agreement, the debtor may continue to deal with the accounts until the lender sends an activation notice to the deposit-taking institution requiring that the institution only take instructions from the lender.

Once the cash collateral provisions come into force, it is very likely that this arrangement would constitute a control agreement and that the ABL lender would have a first priority security in the accounts without the need of any registration, subject to any rights the deposit-taking institution may have in the accounts.

Letters of Credit Facilities

It is sometimes the case that letters of credit facilities are cash collateralized. Imagine for a moment that a particular borrower has a specific account with a deposit-taking institution who is also the issuer of the letters of credit. By way of the simple mechanism provided under the cash collateral provisions, the borrower will be able to grant a first-priority pledge in such specific account to the issuer in order to support the borrower's indemnification obligation to the issuer. The borrower and the secured party may also wish to review current arrangements in order to determine if they will benefit from the cash collateral provisions once such provisions come into effect.

If, for instance, the borrower wishes to offer up a cash account at a third party deposit-taking institution as security for its indemnification obligation to the issuer, the secured party issuer, the borrower and the third party institution would need to enter into a control agreement. As is the case with respect to tripartite control agreements with securities intermediaries, it is anticipated that such control agreement will address any potential priority interest that the third party deposit taking institution may have in the account including by way of any right of set-off.

Coming into force of provisions

The National Assembly will be receiving comments concerning Bill 28 and it is probable that the legislation will be adopted early next year. We do note that the draft proposals suggest that the cash collateral provisions will only come into force at a date determined by the government. This could be a date after the adoption of the law itself.


It is very encouraging to see that the Quebec legislature has proposed the concept of control and other similar rules in a manner that we hope courts will interpret to be harmonious with the rules under Article 9 (UCC). Given that Quebec practitioners now have experience with the notion of control, as applicable to security entitlements, one would hope that the extension into the realm of cash collateral will facilitate comprehension and use.

We will be tracking with great interest the proposed cash collateral provisions as the legislation works its way toward adoption in the Province of Quebec.


1 The examples assume that, by application of Quebec and all other relevant conflict of laws rules, internal Quebec law applies to all applicable questions in respect of the relevant structure.

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

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

In association with
Related Video
Up-coming Events Search
Font Size:
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
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.