Madam Speaker, I am pleased to speak on Bill S-40, an act to amend the Payment Clearing and Settlement Act.
The position of the PC Party's is that we support Bill S-40. I want to make a couple of comments about the S part of the bill. As we heard, the Alliance Party does not like where it originates. The NDP says that it would rather abolish the Senate. Unfortunately the House needs a Senate as much today as it ever has.
Yes, there is a dispute about how people get to the Senate. We all know that they are appointed, not elected. Over the past year, having worked with senators as part of the PC caucus, I certainly have new respect for the Senate. Let us not forget that we do not have the franchise on intelligence in this Chamber. There is a lot of intelligence on the Hill and much of it is in the Senate. Until we change the way people get to the Senate, we will certainly still rely on the Senate to deal with the legislation that passes through the House.
Obviously the purpose of the bill is to provide Canadian securities and derivatives clearing houses with legal protection in the event that a member firm becomes insolvent. Bill S-40 would protect the netting agreement of securities and derivatives clearing houses in the event of the bankruptcy or insolvency of one their members. It would also prevent court order stays that could prevent securities and derivatives clearing houses from realizing the collateral of a bankrupt or insolvent member.
In simple terms, by reducing settlement risk, the bill would allow clearing houses to reduce costs. By reducing costs clearing houses would be able to offer their services for less which would be a gain for the investor. Thus, they would be more competitive in the marketplace.
For those who have just tuned in, to keep this simple I will give a short summary of the background. Canada has three securities and derivatives clearing houses; the Canadian Derivatives Clearing Corporation, the Canadian Depository for Securities and the WCE Clearing Corporation. They clear and settle trades on behalf of members of four exchanges; the Toronto Stock Exchange, the Bourse de Montréal, Calgary's Canadian Venture Exchange and the Winnipeg Commodity Exchange.
To protect against a default before a transaction is completed and settled, member firms are required to post collateral and to net their obligations with the clearing house. However, if a member firm declares bankruptcy, there is a danger that a court could freeze the collateral meaning that it would not be available to clear the transaction.
The United States and the European countries protect such collateral from bankruptcy proceedings, placing Canadian exchanges and clearing houses at a competitive disadvantage with institutions such as the Chicago Mercantile Exchange.
Therefore, Bill S-40 is a step toward addressing the declining competitiveness of the Canadian economy and the declining liquidity of the Canadian capital market. The globalization of financial markets in recent years has permitted investors to move their investments rapidly away from riskier markets to others where the legislative framework is friendlier.
In the United States bankruptcy and solvency legislation generally exempts securities clearing organizations from court order stays and allows them to net the obligations of members and to realize on the collateral of their members. Thus, some trade that could and should occur in Canada, particularly in derivatives, is being handled in the United States because of the risk issues on the Canadian exchanges and the lack of protection in our bankruptcy and solvency legislation.
In particular, the Bourse de Montréal, Canada's major derivatives exchange, is at market disadvantage compared with exchanges such as the Chicago Board of Exchange.
The securities and derivatives industry is significant for our Canadian economy. A strong and competitive Canadian financial market is the key to the overall growth and prosperity of our nation.
However it is difficult to attract large international dealers if Canadian clearing houses face higher costs as a result of their inability to enforce their netting and collateral agreements with their members or because they present greater risks to their participants in the event of the insolvency of one or more members.
Clearing houses for Canadian securities and structured products, such as derivatives and options, must be able to clear transactions in a timely manner, but under the existing laws in Canada they cannot clear transactions when either the buyer or the seller becomes insolvent.
The various Canadian laws that currently govern bankruptcy insolvency, namely the Bankruptcy and Insolvency Act, the Companies' Creditors Arrangement Act and the Winding-up and Restructuring Act, do not offer the same protection to Canadian clearing houses that is offered by the laws of the other G-7 countries. This is of course of great concern to the four exchanges in Canada that trade in securities and structure products, namely the Toronto Stock Exchange, the Bourse de Montréal, the Canadian Venture Exchange in Calgary and the Winnipeg Commodity Exchange. This is also of great concern to the three clearing houses that clear the trades of those four exchanges, namely the Canadian Derivatives Clearing Corporation, the Canadian Depository for Securities Limited, and the WCE Clearing Corporation.
The Bourse de Montréal, on behalf of the Canadian Derivatives Clearing Corporation, and the two remaining clearing houses have all asked that the Payment Clearing and Settlement Act be amended to cover securities and derivatives clearing houses.
Bill S-40 is designed to provide clearing houses with the legal protection they need in the event one of the trading partners become insolvent or bankrupt. The amendments in Bill S-40 would expand the scope of Canada's Payment Clearing and Settlement Act by providing protection for the netting agreements for our securities and derivatives clearing houses. It would also provide protection for the collateral posted by the members of the clearing houses.
Passing this bill will encourage both domestic and foreign investment in Canadian companies. If Canada fails to adapt its financial legislation to international norms, a significant number of Canadian businesses will move to foreign markets.
Bill S-40 would ensure that Canadian markets enjoy the same protection provided by the other G-7 countries. It would enhance our competitive position by enabling clearing houses to lower their costs by reducing the settlement risk caused by poor bankruptcy protection. Thus it would allow our financial markets and institutions to grow their business in Canada and reclaim certain specialized financial business that has moved to foreign markets. It may also attract new investors from the U.S. and other foreign countries.
It should be noted that the amendments to Bill S-40 follow up on the November 2001 recommendations made by the Bank of International Settlements and the International Organizations of Securities Commissions. One of the central recommendations is that the transactions involving the clearing houses have a well-founded legal basis so that the rules and procedures can be enforced with a high degree of certainty. This includes the enforceability of transactions, netting arrangements, and the liquidation of assets pledged or transferred as collateral.
Bill S-40 would help our financial markets to be more competitive, however more needs to be done. Tax reform is crucial. Despite federal and provincial tax cuts, Canadian taxes are still higher than in the U.S., and the United States rates are scheduled to decline over the next four years. A modern regulatory structure that will work in a fast-paced marketplace is also necessary. We must eliminate rules that are duplicative, contradictory or not in the public's interest.
Financing in Canada is more expensive and complicated than it should be. Each new regulatory policy should undergo a rigorous cost-benefits analysis and be implemented in a way that minimizes cost and excessive red tape.
A single national governing body must also be created to oversee Canada's financial markets. The multiple Canadian regulatory authorities have created a fragmented and decentralized system.
In conclusion, securities and derivatives clearing houses are crucial to the efficient operation of our financial markets. Bill S-40 would allow them to reduce costs because of better bankruptcy protection legislation and thus become more internationally competitive. The bill in conjunction with tax reform reducing the regulatory burden and consolidating the many financial market regulatory authorities will help restore Canada's competitiveness. The PC Party will certainly support the bill.