Mr. Speaker, I welcome the opportunity to speak at third reading of Bill S-40, which amends the Payment Clearing and Settlement Act. The bill allows Canadian securities and derivatives clearing houses to be more efficient and competitive with their counterparts in the United States and other G-7 countries. In addition, the bill makes it easier for those clearing houses to lower their costs and also helps to keep trading activity in Canada.
The securities and derivatives industry is an integral component of Canada's financial sector. It provides a key function in the raising of capital and hedging financial risks through derivatives contracts. With almost 200 firms, approximately 37,000 employees and gross revenues in 2001 of $10 billion, the industry's contribution to the overall economy is indeed significant. Central to the industry's success are Canada's major exchanges and clearing houses. Let me take a moment to briefly review their roles.
As hon. members know, the four major exchanges in Canada provide centralized facilities for the trading of securities and derivatives. Each exchange specializes in a particular area. The Toronto Stock Exchange, for example, is the sole market for senior equities. The major market for junior equities is the Canadian Venture Exchange in Calgary, recently renamed the TSX Venture Exchange. The Bourse de Montréal is responsible for all non-commodity derivatives. Transactions involving agricultural commodity derivatives take place on the Winnipeg Commodity Exchange.
The clearing and settlement of trades on these four exchanges is conducted through three clearing houses, which are the focus of today's debate. The Canadian Depository for Securities, CDS, is Canada's national securities depository, clearing and settlement centre. The CDS is also a custodian of securities for federally incorporated institutions. The Canadian Derivatives Clearing Corporation, CDCC, is the clearing house for derivatives contracts traded on the Bourse de Montréal. The WCE Clearing Corporation, WCECC, is the clearing house for derivatives contracts relating to agricultural commodities traded on the Winnipeg Commodity Exchange. Hon. members may be interested to know that the WCECC has an agreement with the CDCC to provide certain clearing and settlement services for the WCECC.
Of course hon. members will note that there will be a test afterwards, so I hope the opposition is paying attention.
These three clearing houses enable consumers and businesses to have their securities and derivatives transactions settled in a timely manner and at a reasonable cost. They do this by providing clearing and settlement services and by acting as a central counter party to securities and derivatives trades. During the second reading debate on the bill I pointed out that securities and derivatives markets depend on these centralized services for a number of reasons. Because of their importance, I believe these reasons bear repeating.
First, securities and derivatives markets are critical in providing opportunities to raise capital for investments and hedging financial risks.
Second, securities and derivatives markets rely on the efficient and timely clearing and settlement of transactions through clearing houses.
Third, clearing houses take measures to reduce risks and costs in the settlement of transactions, measures such as requiring members to post collateral and to net their payment and delivery obligations with the clearing house.
If some hon. members are wondering why this legislation is needed, let me explain. Recent global changes have made it clear that the rules within which Canadian securities and derivatives clearing houses operate need to be updated. With globalization, rapid technological changes and consolidation creating an increasingly competitive environment in today's business world, the Canadian securities and derivatives industry must be able to compete with its counterparts in other countries if it is to remain healthy and sound. Unfortunately, a significant portion of Canadian securities and derivatives trading now occurs in the United States and will continue to take place there unless our industry is allowed to compete on a level playing field.
Hon. members may also be interested to know that any factors which negatively affect the operation of Canadian clearing houses and increase their costs also have a negative impact on securities and derivatives markets by reducing their efficiency and increasing their trade costs. One risk in particular that exists for these clearing houses, and which needs to be addressed, is the risk that a member may default before a transaction is settled, resulting in a financial loss to both the clearing house and its members.
As a central counter party, securities and derivatives clearing houses take measures to reduce this risk, as I mentioned earlier, by requiring members to post collateral and to net their payment and delivery obligations with the clearing house. However, this system makes it difficult for clearing houses in Canada to compete internationally. Laws in Canada do not fully protect netting arrangements and collateral posted with securities and derivatives clearing houses to the same extent that other countries do. This has a negative effect on the competitiveness of our clearing houses, as I have mentioned.
Stakeholders in Canada raised concerns about this problem to the government. For example, they pointed out that Canada's current bankruptcy and insolvency laws do not prevent court imposed stays from securities and derivatives clearing houses realizing collateral in the event that one of their members becomes bankrupt or insolvent. Stakeholders were also concerned that Canadian bankruptcy and insolvency laws add to the costs of their clearing house operations and of their members by increasing the costs related to the risk of a failure of one of their members. In particular, they noted the difficulty of convincing large international dealers to do business in Canada if our clearing houses face higher costs because they cannot enforce their netting and collateral agreements with members in the event of the insolvency of one or more members.
As a result, stakeholders suggested that the Payment Clearing and Settlement Act be amended to cover securities and derivatives clearing houses.
Let me digress for a moment and review the advantages provided by some of the other countries with which our clearing houses are in competition. In the United States, for example, bankruptcy and insolvency legislation generally exempts securities clearing organizations from court ordered stays and allows them to net the obligations of members and to realize their members' collateral. In the European Union, member states must ensure that securities settlement systems can net obligations and that the netting is legally enforceable and binding on third parties in the event of insolvency. In addition, collateral must be realized in a timely manner in any winding-up procedure.
Given how our major competitors function, it is imperative that changes be made to ensure that Canadian securities and derivatives clearing houses can compete with those in the United States and in Europe.
The government responded with the bill we are debating today. This legislation expands the Payment Clearing and Settlement Act to include legal protections for Canadian securities and derivatives clearing houses of their netting agreements and collateral posted by their members. These amendments protect netting agreements and prevent stays imposed by a court on the ability of securities and derivatives clearing houses to realize collateral in the event of the bankruptcy or insolvency of one of their members.
Bill S-40 would make Canadian securities and derivative clearing houses more efficient and more competitive with the United States and the G-7 countries. It would help keep trading activity in Canada.
Hon. members should keep in mind that the amendments are in line with recent recommendations made by the Bank for International Settlements with respect to securities settlement systems and securities clearing houses. In addition, they are in keeping with the commitment the government made in the Speech from the Throne in January, 2001 to keep Canadian laws competitive. Above all, the amendments have the support in Canada of financial sector participants and their associations, provincial governments and the insolvency community.
It is essential that Canada's financial sector remain strong, healthy and efficient. Bill S-40 would help ensure this. A competitive legal machine would help keep securities and derivative trading in Canada and assist the industry in attracting international dealers and brokers.
The legislation is not controversial. With the changes the securities and derivatives industry would more be competitive and thereby benefit the Canadian financial sector and overall economy. I urge all hon. members to give Bill S-40 speedy passage.