Evidence of meeting #87 for Finance in the 41st Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was capital.
A video is available from Parliament.
Chief, Financial Institutions Division, Structural Issues, Financial Sector Policy Branch, Department of Finance
No. I am talking to you about what is now found in Bill C-38.
Chief, Financial Institutions Division, Structural Issues, Financial Sector Policy Branch, Department of Finance
There are not any additional criteria.
Conservative
Liberal
Rodger Cuzner Liberal Cape Breton—Canso, NS
Could you describe the process in which a sovereign wealth fund would have to seek the approval of the minister before investing in a Canadian bank?
Director, Financial Institutions Division, Financial Sector Policy Branch, Department of Finance
Sure. My colleague Annie has just explained the process for getting the approval of the Superintendent of Financial Institutions. In this case it would work the same way. The applicant and the financial institution in Canada would both come to OSFI to make an application. OSFI would assess it from a prudential perspective, would bring a recommendation forward to the Minister of Finance, and then there would be a process whereby we would consider whether the criteria that were added to the law in Bill C-38 had been met. That recommendation would then go to the minister for approval.
Liberal
Rodger Cuzner Liberal Cape Breton—Canso, NS
Is there a public portion on that? Does it have to go public at any time before that, with public notification?
Director, Financial Institutions Division, Financial Sector Policy Branch, Department of Finance
There are points in time at which there has to be notification in the Canada Gazette that an application has been made.
Liberal
Conservative
The Chair Conservative James Rajotte
Thank you.
We want to thank our officials for being with us today. We appreciate your responses.
Colleagues, division 2 has been sent to the transport committee, so we will deal with division 3, dealing with the amendment to the Canada Deposit Insurance Corporation.
Welcome to all of you. On behalf of the committee, thank you for being here.
I've been asked if I would have you provide a short briefing to the committee on this division, on these amendments.
Jean-François Girard Senior Project Leader, Financial Sector Policy Branch, Department of Finance
My name is Jean-François Girard. I work in the financial sector division, and I'm here with my colleagues, Wayne Foster and David Smith, from the financial markets division.
There are two components to this section. I'll explain the first component, and my colleagues will explain the second component.
The first component is reflected in clauses 166 and 167 of the division. These clauses amend the Canada Deposit Insurance Corporation Act. I will describe very briefly the existing legislative framework so you can better understand the amendments in their proper context.
Currently, the Canada Deposit Insurance Corporation has the power to create a bank called a bridge bank that would take over the operations of a failing bank. That's a bank that's no longer viable. The failing bank is a party to several contracts. Some of these contracts are called eligible financial contracts. An example of that is derivatives that the banks use to manage their risk. Currently, when a bridge bank is created, the legislation provides that a conditional stay can be imposed on the termination clauses of these eligible financial contracts, and the stay is imposed if the Canada Deposit Insurance Corporation undertakes to guarantee the obligations of the failing member institution under the contract, or it transfers these obligations to the new bridge bank that is created. That's the current framework, and that stay makes the creation of a viable bank easier, the new bank that's being created.
The proposed amendments provide for a new stay. It's for one business day, and it's on the same criteria so it prevents counterparties in these eligible financial contracts from terminating their contract as a result of the creation of the bridge bank. It's either the insolvency of the failing bank, or an order creating this bridge bank. You cannot invoke these events to terminate your contract. That would facilitate the creation of the bridge bank, because it would provide one day for the CDIC to decide which of these financial contracts are transferred to the new bank, or which ones will stay in what is called the bad bank, the insolvent institution that's failing.
An important exception to this stay is that the EFCs that are cleared through central counterparties are designated and named under sections 4 and 13.1 of the Payment Clearing and Settlement Act. They're exempted from that stay. This proposal in terms of context would be consistent with international standards adopted by the G-20.
Wayne Foster Director, Financial Markets Division, Department of Finance
Thank you, Jean-François.
I will be speaking to clauses 168 to 172 of the bill, which amend the Payment Clearing and Settlement Act.
These are quite technical and hard to put into simple language, but they are important amendments to facilitate the central clearing of over-the-counter derivatives transactions.
To provide some background, the Payment Clearing and Settlement Act, PCSA, protects clearing and settlement systems which are, of course, integral to the operation and stability of our financial system, by essentially standing between two parties to a financial transaction, protecting against conflicting or competing laws or court decisions that might otherwise apply in the case where one of the participants were to default or become insolvent.
For example, the act protects the rules of a securities clearing house. It ensures that the rules of a securities clearing house for determining final settlement amounts or the arrangements for netting transactions, or the transfer of payments or collateral between parties to the clearing house are paramount or final and can't be challenged by a court or through other means.
It also provides a framework within which the Bank of Canada can regulate and supervise designated payment systems.
To date, most of the clearing houses that fall under the PCSA have been clearing houses for cash securities or cash payments, for example, government bonds or equities, or large-value payments between major banks, in other words, not over-the-counter derivatives transactions.
However, as many of you will know, in September 2009, G-20 leaders agreed that going forward, standardized over-the-counter derivatives transactions should be centrally cleared to increase financial stability. As a result, you will see increased use of derivatives clearing houses by Canadian banks and other financial institutions in the future.
The amendments that are in these provisions will aim to ensure that derivatives clearing houses, some of which may be based offshore, are accorded the same protections as clearing houses that fall under the act currently, which are mainly cash clearing houses. As noted, the amendments are quite technical. They amend some definitions. There is some increase in the scope in certain areas to cover these derivatives clearing houses, and clarifying certain other language, but very important.
November 1st, 2012 / 4:55 p.m.
Conservative
NDP
Hoang Mai NDP Brossard—La Prairie, QC
Thank you for your presentation.
I just wanted to understand one thing regarding the Canada Deposit Insurance Corporation. It includes several members, including the financial institutions and the Autorités des marchés financiers. Can you confirm to me that this is so?
Senior Project Leader, Financial Sector Policy Branch, Department of Finance
No. The members are depositary institutions, that is, institutions that accept deposits. They are banks and trust companies.
Senior Project Leader, Financial Sector Policy Branch, Department of Finance
Credit unions do not come under the federal structure, so they are not members.
NDP
Hoang Mai NDP Brossard—La Prairie, QC
That is right. Yes.
You were talking about having a centralized clearing house. There were consultations with the provinces. Were there any discussions? Did the financial institutions, in Québec or elsewhere, express any objections?
Director, Financial Markets Division, Department of Finance
In terms of the specific amendments that will protect central counterparties' derivatives transactions, we did consult provincial regulators, including the AMF, for example, in Quebec, before we brought them forward.
Director, Financial Markets Division, Department of Finance
Quite the contrary, there was very much support for this initiative.
NDP
Hoang Mai NDP Brossard—La Prairie, QC
Just so I can have a better understanding, when you talk about having the clearing houses offshore or somewhere else, is it possible to do it here in Canada also? Are there any specific bodies that do that here in Canada?
Director, Financial Markets Division, Department of Finance
Yes, there are a number. One example, based in Quebec, is CDCC, which clears futures and options transactions traded on the Montréal Exchange and has started to clear certain over-the-counter derivatives products connected to equities.
NDP
Hoang Mai NDP Brossard—La Prairie, QC
Is the idea behind these amendments to have regulations that would apply to every clearing house, so that the rules and protection are pretty much the same? Is that it?