Canadian Securities Lawyer & Attorney : Stikeman Elliott Law Firm : Montreal, Ottawa, Calgary, Vancouver, Montreal, Toronto

On November 14, 2008, the President’s Working Group on Financial Markets (PWG) announced a number of initiatives intended to provide regulatory oversight and prudent management of the over-the-counter derivatives market. These initiatives include the implementation of central counterparty services for credit default swaps and the signing of a Memorandum of Understanding between the Federal Reserve, SEC and the Commodity Futures Trading Commission with respect to information sharing and consultation regarding CDS central counterparties issues. The PWG also announced a set of policy objectives to “guide efforts to address challenges associated with OTC derivatives.”

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The Department of Finance has now released the terms of the Canadian Lenders Assurance Facility. For more information on the Facility, see our post of October 23, 2008.

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Lewis Smith and Justin Parappally |  PDF Version

The Government of Canada has introduced new measures to provide liquidity to Canadian financial institutions. Earlier measures are described in this post of October 23.

Today, the Ministry of Finance advised that the mortgage-backed securities purchase program announced previously will be increased from $25 billion to $75 billion. $12 billion in purchases have already been made from the first tranche of the purchase program, with an additional $7 billion expected to be purchased in an auction taking place today. The final purchases from the first tranche are expected to take place on November 21.

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This morning, the Department of Finance announced a plan to add up to $50 billion to its Insured Mortgage Purchase Program. The additional investment brings the maximum value of securities purchased through the CMHC to $75 billion. Meanwhile, the base commercial pricing of the recently-announced Canadian Lenders Assurance Facility will drop by 25 basis points and the 25 basis point surcharge for insurance will also be waived until further notice. The latter changes are intended to make the Facility “more competitive with similar programs offered in other countries.”

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Following the completion of its recent testing phase, Alpha Trading Systems (Alpha), a Canadian alternative trading system (ATS) has announced that it will formally launch on November 7, 2008. Owned by nine major Canadian financial institutions, Alpha will operate as a visible continuous auction market and initially support trading of ten TSX-listed securities. Its stated objective, however, is to have all TSX and TSXV-listed securities available for trading on its platform by the end of the first quarter of 2009.

Alpha is the latest new marketplace to join the Canadian landscape, which also includes Pure Trading, Omega ATS, Chi-XCanada and Blockbook.

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In response to the CSA's proposed amendments to NI 23-101 Trading Rules, released earlier this month, IIROC has now published for comment proposed amendments to the Universal Market Integrity Rules that would correspond to the changes to NI 23-101. IIROC's proposed amendments would include repealing the rule and policies respecting the "best price" obligation concurrent with the implementation of trade-through protection. With the publication of the proposed amendments, IIROC also withdrew from further consideration interim provisions on trade-through obligations, previously published by Market Regulation Services (a predecessor to IIROC). Until the amendments implementing trade-through protection are made to NI 23-101 and UMIR, however, Participants remain subject to the "best price" obligation under Rule 5.2 of UMIR.

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In response to the recent turmoil in global markets, Canadian Minister of Finance Jim Flaherty announced this morning the creation of the Canadian Lenders Assurance Facility. The facility, to commence in November and run for six months, will offer insurance on the wholesale term borrowing of federally regulated deposit-taking institutions. Insurance will be available on certain debt issues with a term to maturity of at least three months. The stated intention of the initiative is to ensure that Canadian financial institutions "are not put at a competitive disadvantage when raising funds in wholesale markets given similar actions recently announced by other countries."

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The CSA have published proposed amendments to National Instrument 21-101 Marketplace Operation (NI 21-101) and National Instrument 23-101 Trading Rules (NI 23-101) (the ATS Rules) (and their related companion policies) for comment and review. The proposed amendments include proposals for a framework to implement trade-through protection that will require all visible, immediately accessible, better-priced limit orders to be filled before other limit orders at inferior prices, regardless of the marketplace where the order is entered. Other amendments relate to clock synchronization, technology requirements for marketplaces, information processor requirements, and best execution reporting requirements.These proposed amendments on trade-trough protection have been developed further to the discussion paper published by the CSA on July 22, 2005, entitled CSA Discussion Paper 23-403 Market Structure Developments and Trade-through Obligations and the Joint Notice on Trade-Through, Best Execution and Access to Marketplaces published by the CSA in conjunction with RS (now IIROC) on April 20, 2007. Comments on these proposed amendments will be accepted until January 15, 2009.

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In addition to its ABCP study, IIROC has also published for comment a draft guidance note entitled "Best practices for product due diligence". Specifically, IIROC is requesting comment on the relevant criteria in determining whether a product should be subject to a due diligence review, factors to be considered in conducting product due diligence and the structures and procedures necessary for an effective review. 

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On October 17, the Investment Industry Regulatory Organization of Canada (IIROC) announced the publication of a study concerning the manufacture and distribution of third-party asset-backed commercial paper in Canada. The study reviews the events leading up to the "liquidity crisis" of August 2007 in the ABCP market and includes recommendations concerning product due diligence, product transparency, conflicts of interest and credit ratings.

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In June, the BCSC imposed Conditions of Registration for B.C. investment dealers that trade in securities of over-the-counter (OTC) issuers through a B.C. office. Investment dealers that trade in American OTC markets must complete and file Form B, which records the information required under the conditions, within 30 days of the end of each calendar quarter.

The conditions expire on December 31, 2011.

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On October 15, 2008, IIROC published a notice regarding the approval of amendments to the Universal Market Integrity Rules respecting short sales and failed trades. The amendments are based on an earlier notice, published in September 2007, and are intended to address potential abusive short selling and failed trade activity. These amendments will require reporting of failed trades after 10 trading days, limit the ability to cancel or vary executed trades, and allow IIROC to designate certain securities as ineligible for short sales entirely. They are also expected to involve the imposition of hard “pre-borrow” requirements in the case of persons who have executed failed trades, which will be subject to a request for comments. IIROC also announced that it is deferring adopting the removal of current short sale price restrictions and the removal of current requirements to file bi-monthly aggregate short position reports.

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On October 9, 2008, the Alberta Securities Commission announced that it was granting recognition to the Natural Gas Exchange (NGX) to operate as an Exchange and Clearing Agency. Wholly owned by TMX Group, the NGX is based in Calgary and operates an energy exchange and a physical clearning and settlement facility for natural gas and electricity contracts.

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In response to last week's OSC Extension Order with regards to the prohibition on the short sale of certain TSX-listed financial companies, IIROC has published guidance on the handling of short sales.

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 PDF Version

On October 6, 2008 the Canadian Securities Administrators (the CSA) published CSA Consultation Paper 11-405 entitled “Securities Regulatory Proposals Stemming from the 2007 – 08 Credit Market Turmoil and its effect on the ABCP Markets in Canada” (the Consultation Paper). The Consultation Paper is divided into two parts, with the first part providing a narrative overview of the background to the credit market turmoil in the United States, its spread into Canada and its impact on the non-bank sponsored portion of the asset-backed commercial paper (ABCP) market in Canada. The second part of the paper sets out proposals made under the Concept Paper to deal with the credit market turmoil and related issues in Canada. 

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Today, the OSC extended its prohibition on short sales of certain TSX-listed financial companies that are interlisted in the U.S. or have outstanding securities that are interchangeable into shares of a financial company listed in the similar SEC Order. The prohibition expires on October 8, 2008, which corresponds to the expiration of the SEC Order, now that the "bailout" bill has been signed. The original Temporary Order, implemented September 19 and amended on September 22, was set to expire today.

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The SEC announced yesterday that it was extending the Emergency Order of September 18 prohibiting the short selling of financial institutions. The Order was set to end at the end of the day on October 2nd, but considering the current state of the market, the SEC decided to extend the Order until the earlier of either the President's signing of the market "bailout" bill or 11:59 p.m. on October 17th, 2008.

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The SEC has also extended its Emergency Order of September 17, 2008, which banned "naked" short selling. The Order was set to expire at the end of day October 1, but has now been extended to 11:59 p.m. on October 17, 2008. In the press release accompanying the extension Order, the SEC also communicated that the temporary reporting requirements regarding new short sales and the penalties for violations will extend beyond the above date in the form of an interim final rule.

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On October 1, the SEC announced that it is extending its Emergency Order of September 18 temporarily broadening the safe harbour from liability for issuers repurchasing securities. The extended Order will now terminate at 11:59 p.m. on October 17, 2008.

Update: The TSX has taken a similar course of action, extending its previous notice to October 17.

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On September 22, the OSC issued an amended Temporary Order with respect to the restrictions on short sales in order to address technical and operational matters originating from their original Temporary Order and to support similar issues addressed by the SEC.

Further, IIROC has released a Restated Reminder Respecting Obligations in the Conduct of Short Sales in order to review the obligations of Participants and Access Persons in the handling of short sales. Of interest, the reminder also states that as part of its market activity monitoring, IIROC intends to increase surveillance of short selling activity, in particular of issuers in the financial sector not covered by the OSC's Temporary Order.

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On September 19, the OSC issued a Temporary Order to restrict short selling in certain TSX-listed financial companies that are interlisted in the U.S. or have outstanding securities that are interchangeable into shares of a financial company listed in last week's SEC Order. The OSC's order is intended "to prevent regulatory arbitrage with respect to short selling in Ontario of...and promote fair and orderly markets in Ontario for" the relevant securities. Unless extended, the Temporary Order will expire on October 3, 2008.

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The U.S. SEC has recently issued new rules, effective September 18, which require short sellers and broker-dealers to deliver securities by the close of business on the settlement date. A broker-dealer in violation of the close-out requirement will be forced to locate and pre-borrow securities for future short sales in the same security. The SEC took action due to its concern "about the possible unnecessary or artificial price movements based on unfounded rumors regarding the stability of financial institutions and other issuers exacerbated by 'naked' short selling."

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IIROC has approved amendments to Dealer Member Rules 100.2, 100.2(j) – Interest Rate Swaps and 100.2(k) – Total Performance Swaps in order to clarify the margin requirements for swaps where the counterparty is a regulated entity. The amendments were approved by the IDA Board of Directors on December 12, 2007 and took effect September 8, 2008.

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On August 12, 2008, the Minister of Finance approved amendments to NI 21-101 and NI 23-101, which are set to come into force on September 12, 2008. As described in our earlier post, the CSA initially approved amendments to NI 21-101 Marketplace Operation (NI 21-101) and NI 23-101 Trading Rules (NI 23-101) in June 2008 to deal mostly with the best execution obligation of dealers and advisers.  An unofficial consolidation of the amendments can be found here.

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On Friday, the CSA published CSA Notice 46-305 Second Update on Principal Protected Notes. The purpose of this notice is to provide an update on the CSA’s review of PPNs and the recent coming into force of federal regulation applicable to PPNs (the “Federal PPN Regulations”).

The CSA are of the view that the Federal PPN Regulations, together with the CSA’s continuing regulatory initiatives and discussions with IIROC and the MFDA, will substantially address the CSA’s key concerns with PPNs, which were identified in CSA Notice 46-303. 

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Sterling H. Dietze

An Act respecting the transfer of securities and the establishment of security entitlements (the Quebec STA) received Royal Assent on June 20, 2008 and will come into force on January 1, 2009. The adopted legislation differs from Bill 47 as initially introduced in the National Assembly and upon which we commented in December 2007.

The Quebec STA seeks to implement the principles of the Uniform Securities Transfer Act, while harmonizing Quebec's rules with the securities transfer legislation of other provinces. The concepts found in the Quebec STA follow the model of the USTA and Article 8 of the U.S. Uniform Commercial Code (including the companion provisions of UCC Article 9). The Quebec STA introduces or formalizes into Quebec law concepts such as adverse claims, securities intermediaries, security entitlements, entitlement holders, securities accounts, financial assets, control and protected purchasers.

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In a press release dated August 13, 2008, the U.S. SEC announced that it was publishing for comment an agreement among self-regulatory organizations intended to improve the surveillance and detection of insider trading. The agreement seeks to better protect investors and improve market integrity by reallocating regulatory responsibility in order to eliminate duplication and gaps in surveillance among equity markets.

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Philip Henderson

On June 11, 2008, the federal government published the new Principal Protected Notes Regulations (the Regulations), which are intended to come into force on July 1, 2008. The Regulations were introduced in response to the growing variety and complexity of principal protected notes (PPNs) currently being offered by financial institutions and build on the existing Index-linked Deposits Interest Disclosure Regulations, which will be repealed with the adoption of the new Regulations. The new requirements seek to ensure that investors in PPNs are adequately informed by improving the manner, content and timing of disclosure for these types of investments.

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The CSA have approved amendments to NI 21-101 Marketplace Operation (NI 21-101) and and NI 23-101 Trading Rules (NI 23-101) to deal mostly with the best execution obligation of dealers and advisers.

The Amendments, now scheduled to come into force on September 12, 2008, were initially published for comment along with other proposed amendments on April 20, 2007 with the Joint Notice on Trade-Through, Best Execution and Access to Marketplaces (originally published in conjunction with RS, now IIROC. The CSA have now decided to separate these three topics and deal with each separately on separate timetables.

The current amendments deal with best execution along with some other minor changes, including changes related to the electronic audit trail provisions. Amendments dealing with trade-through protection and rules related to access to marketplaces are proposed to be dealt with under separate requests for comment in the coming months.

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Alix d'Anglejan-Chatillon and Jason Streicher | Version française

On May 30, 2008, the Montréal Climate Exchange (MCeX) officially launched the trading of a futures contract on Canada carbon dioxide equivalent (CO₂e) units.

As was noted by MCeX chairman Luc Bertrand at the official launch ceremony, "the listing of the MCeX futures contract is a 'first' and it makes the Montréal Climate Exchange the first regulated environmental market in Canada." The MCeX is a joint venture between the TMX Group's Montréal Exchange (MX) (the Canadian derivatives exchange) and the Chicago Climate Exchange® (CCX), which operates the world's first greenhouse gas (GHG) emissions reduction and trading system. The launch of the MCeX is intended, in the words of CCX Chairman and Founder Richard Sandor, to position Canada "at the forefront of environmental finance and integrated emissions trading."

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Ralph A. Hipsher and Kenneth G. Ottenbreit | Version française

The Ontario Securities Commission has recently granted relief to dealers distributing foreign securities by way of private placement into Canada to address uncertainties caused by new forward-looking information disclosure requirements.

Effective December 31, 2007, the Canadian Securities Administrators (CSA) made significant amendments to forward-looking information disclosure requirements under continuous disclosure rules applicable to Canadian reporting issuers. The Ontario Securities Commission (OSC) also concurrently amended requirements relating to offering memoranda disclosure contained in OSC Rule 45-501. As a result of these amendments to OSC Rule 45-501, any offering memorandum provided to purchasers in Ontario that contains material forward-looking information (including future-oriented financial information and financial outlooks) is required to also contain certain prescribed forward-looking information disclaimers or safe-harbour type of disclosure. While this disclosure is similar to safe-harbour disclosure provided under U.S. or foreign securities law requirements, it also requires the issuer to address additional matters not typically encompassed by the equivalent non-Canadian disclosure.

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The OSC has approved amendments to NI 24-101 to further extend the phased-in transition periods under that Instrument.  Under this extension, the deadline for registrants to comply with the matching deadline of midnight on T has been extended to July 1, 2010 and other transitional phase-in periods have been extended by another 24 months.

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Kenneth G. Ottenbreit, Ralph A. Hipsher and Terence W. Doherty | Version française

On February 29, 2008, the Canadian Securities Administrators (CSA) published their revised proposals on National Instrument 31-103 Registration Requirements ("the Instrument"), relating to registration requirements for dealers, advisers and investment fund managers. The proposed registration reforms represent a major restructuring of the Canadian dealer, adviser and investment fund manager registration rules and have implications for non-Canadian dealers, advisers and investment fund managers doing business on a registered or exempt basis in any province or territory of Canada.

The Instrument is intended to create a streamlined and harmonized approach to the regulation of investment activities across Canada. Canada does not have a national or federal securities regulator; securities activities are regulated by Canada's thirteen provincial and territorial securities regulators (the CSA is their umbrella organization).

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Alix d'Anglejan-Chatillon and Sterling H. Dietze| Version française

A legislative proposal to establish a new Derivatives Act was tabled by the Québec Minister of Finance on April 9, 2008.  Bill 77 follows the publication in August 2007 by the Autorité des marchés financiers (Québec's financial markets regulator) of a proposed framework for the regulation of the derivatives markets in Québec and an earlier concept paper in May 2006, both of which attracted detailed comments by Canadian and foreign stakeholders in the industry.  The proposed Québec Derivatives Act would regulate both over-the-counter (OTC) and exchange-traded derivatives in standalone legislation, subject to certain carve outs for OTC derivatives activities involving designated "accredited counterparties".

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Alix d'Anglejan-Chatillon, Jennifer Northcote and Kenneth G. Ottenbreit | Version française

On February 29, 2008, the Canadian Securities Administrators (CSA) published their revised proposals relating to national registration requirements for dealers, advisers and investment fund managers.  Over 260 comment letters were received on the original proposals (published in February of 2007). These proposals constitute an overhaul of registration requirements and registration exempt activities, and are intended to present a streamlined and harmonized approach to the regulation of investment activities across Canada. The revised proposals are open for comments until May 29, 2008. Continue Reading...

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Jennifer Northcote and Alex Colangelo

On January 11, 2008, the Canadian Securities Administrators (CSA) published a revised version of National Instrument 23-102 Use of Client Brokerage Commissions as Payment for Order Execution Services or Research Services (the Instrument) as well as Companion Policy 23-102 CP (the Policy). The Instrument and Policy were originally published in July 2006 (the 2006 Instrument and Policy) [See Stikeman Elliott Securities Law Update of August 2006]. In response to numerous comments received, the CSA has made substantive amendments to the 2006 Instrument and Policy by limiting the application of the Instrument, broadening the definition of permitted services that may be paid for by soft dollars and relaxing the disclosure requirements.

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New rules largely consistent with other jurisdictions

Brian G. Hansen and Ralph A. Hipsher

In Canada, disclosure of forward-looking information (FLI) (including disclosure of future-oriented financial information (FOFI) and financial outlooks) has been governed by the somewhat outdated and imprecise National Policy 48 (NP 48). Effective December 31, 2007, the Canadian Securities Administrators (CSA) will be revoking NP 48 and replacing it with harmonized national rules in the form of amendments to National Instrument 51-102 Continuous Disclosure (NI 51-102).

These amendments to NI 51-102 will apply to all disclosure of FLI and will primarily govern disclosure of FLI by entities that are "reporting issuers" in a Canadian jurisdiction. Notably, however, disclosure of FLI contained in prospectuses, rights offering circulars and offering memoranda issued by non-reporting issuers will also be subject to these requirements. While many non-reporting issuers may not previously have been subject to NP 48, there has long been some confusion about its application and breadth. The clear and concise requirements of the proposed amendments are therefore a welcome development, particularly as they largely reflect similar disclosure requirements in other jurisdictions.

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On November 24, 2007, Canada's federal Department of Finance announced proposed new regulations under the Bank Act, Cooperative Credit Associations Act and Trust and Loan Companies Act that will apply to Principal Protected Notes (PPNs). As reported in the Canada Gazette, the new regulations would define PPNs and specify "the content, manner and timing of disclosure that federally regulated deposit-taking institutions are required to provide at the point of sale for various sales channels" as well as other consumer-related requirements. The proposal is part of the federal government's "Advantage Canada" competitiveness program, designed to promote flexible outcomes-focussed approaches to regulation in response to rapid developments in global financial markets. Those wishing to comment have 30 days from the date of publication to respond.

The draft regulation is available online in the Canada Gazette, Part I for November 24, 2007, beginning on page 3279.

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Posted with permission and appears in Euromoney's Global Banking & Financial Policy Review 2006/2007

Sherry Roth and D'Arcy Nordick

The maple bond market in Canada evolved as a result of changes announced in the February 2005 Canadian Federal Budget removing the "foreign property limit" that  restricted Canadian institutional and individual investors in tax deferred investments (including pension and retirement funds) to holding no more than 30% of total assets in foreign securities. Since then, the maple bond market has been accessed by numerous foreign debt issuers, and some domestic Canadian issuers, using existing debt issuance programmes.

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Daniella Laise and Jennifer Northcote

This is a reminder that the deadline for compliance with the first phase of National Instrument 24-101 - Institutional Trade Matching and Settlement (NI 24-101) is just around the corner, with certain provisions of the instrument coming into force on October 1, 2007.

NI 24-101 requires that all participants involved in institutional trades (which includes investment advisers, investment dealers and custodians) make changes to their trade order management systems and operational processes to meet the timing and performance objectives set out in NI 24-101 to achieve trade-matching by the end of business on trade date (T).

NI 24-101 adopts a phased-in approach, setting out progressive trade-matching milestones, with the expectation that matching institutional trades by the end of T will be achieved by July 1, 2008.

As part of the initial phase-in of NI 24-101, compliance with the following is required by no later than October 1, 2007:

• Trade-matching parties are to adopt and enforce policies and procedures designed to achieve matching as soon as practical after an institutional trade is executed;
• Registered dealers and advisers will be prohibited from accepting or giving orders to execute DAP or RAP on behalf of an institutional investor unless each trade-matching party has either entered into a trade-matching agreement or provided a trade-matching statement containing assurances that they have established and enforce policies and procedures to meet the requirements of NI 24-101;
• Exception reporting requirements are triggered if less than 80% of institutional trades are matched by noon on T + 1.

For additional information and compliance deadlines, please see this update.

See also CSA Staff Notice 24-305 issued December 14, 2007 for answers to frequently asked questions on NI 24-101.

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NI 24-101 IMPORTANT DATES

• Trade-matching agreements or written statements are to be in place by October 1, 2007.
• Progressi