Just before Canada’s Liberal government fell in late 2005, Parliament passed a relatively comprehensive set of amendments to the Bankruptcy and Insolvency Act and the Companies’ Creditors Arrangement Act. The time available to the amendments’ drafters was very short and the House and Senate committees had even less opportunity to review it. This expedited process proved unfortunate for the derivatives industry for a couple of reasons. First, the drafters of the amending legislation did not have enough time to consider reform initiatives recommended by ISDA to bring Canadian insolvency law up to international standards, particularly with respect to protection for rights against collateral. As a result none of the needed reforms were made part of the initial draft of the legislation and there was no opportunity to raise those matters before either the Senate or House committees. Second, there were drafting errors in the legislation that inadvertently set back the termination rights protection for eligible financial contracts. It had been intended that those errors would be fixed when the legislation was reviewed by the House of Commons Committee, but since there essentially was no such review, that did not happen. The Bill passed in the dying days of the government, but with a commitment that it would not be brought into force until June 30 at the earliest and not until the Senate Trade and Banking Committee could take another look at it.
There is a high degree of confidence that these amendments (now S.C. 2005, c. 47) will not be brought into effect without fixing the drafting errors with respect to termination rights.
The degree of confidence is not quite as high that the Canadian government will introduce any additional reforms, but there is a reasonable chance that it will. ISDA, with the help of other industry groups, such as the Investment Dealers Association of Canada and the Canadian Bankers Association, as well as market participants, has been effective in bringing the issues to the attention of the highest levels within Industry Canada and Finance Canada, the two departments with responsibility for the insolvency legislation.
The reforms urged on the federal government are:
To exempt from automatic and court-ordered stays the exercise of rights against financial collateral, including sale, foreclosure and set-off, for eligible financial contracts (EFCs).
To include express recognition that the provision of top-up and substitute financial collateral is not voidable under any of the preference and voidable transaction provisions and does not give rise to any presumption that the transaction is voidable solely by reason of the fact that it takes place within the designated pre-insolvency proceeding periods.
To clarify that the new special priorities provided for in the BIA and CCAA, including debtor-in-possession financing, do not have priority over financial collateral for EFCs.
To extend the list of EFCs either by regulation or by amendment to the insolvency statutes to:
clarify that all forward commodity contracts are included notwithstanding that they have a purpose other than a purely financial purpose
improve the language of the basket clause along the lines of the U.S. Bankruptcy Code
To include title transfer collateral arrangements within the list of eligible financial contracts. This will clarify that they cannot be recharacterized for insolvency law purposes and consequently make it clear that they can be included within the termination and netting mechanism of the master agreements to which they relate.
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Canada has a mature, competitive and well-regulated asset management sector, which has remained buoyant (along with the Canadian economy generally) despite the pressures caused by the global financial crisis...
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