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 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.
Current close-out protections for EFCs in CDIC Act
Under the current law, a Canadian bank that is in financial
difficulty could be subject to one of two types of order made under
section 39.13(1) of the CDIC Act by the federal Cabinet on
the recommendation of the Superintendent of Financial Institutions
("Superintendent"). These are (1) an order vesting the
shares of the institution in CDIC and (2) an order appointing CDIC
as receiver of the institution. These orders have different
effects, but in both cases there is, subject to an exemption for
EFCs, an automatic stay on termination or accelerating payments
under contracts by reason only of (i) the federal member
institution's insolvency, (ii) a default, before the order was
made, by the federal member institution in the performance of its
obligations under the agreement, or (iii) the making of the order.
With respect to EFCs, however, there is an exemption to allow a
counterparty to terminate, net and deal with financial collateral
(the "EFC exemption").
2009 amendments: enabling assignment of EFCs
The 2009 amendments permit EFCs to be assigned to a bridge
institution. Section 7.1, the section not yet in force, provided
that if an order directing the incorporation of a bridge
institution is made, then the counterparty cannot close-out an EFC
if CDIC undertakes to unconditionally guarantee the payment of any
amount due or that may become due in accordance with the provisions
of the EFC by the institution and to ensure that all obligations
arising from the EFC will be assumed by the bridge institution.
Section 7.1 reads as follows:
(7.1) If an order directing the
incorporation of a bridge institution is made, the actions referred
to in subsection (7) may not be taken by reason only that the order
or an order appointing the Corporation as receiver is made in
respect of the federal member institution or that the eligible
financial contract is assigned to the bridge institution if the
Corporation undertakes to
(a) unconditionally guarantee the
payment of any amount due or that may become due - in accordance
with the provisions of the eligible financial contract - by the
federal member institution; or
(b) ensure that all obligations
arising from the eligible financial contract will be assumed by the
Unless and until CDIC makes that undertaking, a party to an EFC
is free to rely on the EFC safe-harbour. Unfortunately the 2009
amendments did not make it clear (as do the similar U.S.
provisions) that CDIC cannot assign individual transactions, but
must assign all protected transactions between the institution and
the party. In recognition that this was not the intention, the
proclamation of section 7.1 into force had been delayed.
2010 proposed amendments: no cherry-picking assigned EFCs
The consequential amendments to the CDIC Act introduced
by Bill C-9 propose to clarify that either all or none of the
eligible financial contracts between the member institution and its
counterparty must be assigned to the bridge institution, together
with the related credit support. In other words, there is no
cherry-picking. In addition, contracts with related parties should
also be assigned to the bridge institution. This ensures that
structures involving several different transactions among related
parties that are contractually connected are not potentially
disrupted by the assignment to the bridge institution of the
eligible financial contracts.
(7.2) The Corporation may assign to a
bridge institution eligible financial contracts - including any
claim under such contracts - that are between a federal member
institution and an entity or any of the following entities provided
that the Corporation assigns all of those eligible financial
contracts to the bridge institution:
(a) another entity that is controlled
- directly or indirectly - by the entity;
(b) another entity that controls -
directly or indirectly - the entity; or
(c) another entity that is controlled
- directly or indirectly - by the entity referred to in paragraph
(7.3) If the eligible financial
contracts are assigned to a bridge institution,
(a) the undertaking referred to in
subsection (7.1) that is provided applies to all the eligible
financial contracts that are assigned; and
(b) the federal member
institution's interest or, in Quebec, right in property that
secures its obligations under an eligible financial contract that
is assigned is transferred to the bridge institution.
We anticipate that section 7.1 will be brought into force
together with new sections 7.2 and 7.3.
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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