House of Commons Hansard #186 of the 37th Parliament, 1st Session. (The original version is on Parliament's site.) The word of the day was c-55.


Excise Act, 2001Government Orders

3:45 p.m.


Bernard Bigras Bloc Rosemont—Petite-Patrie, QC

Mr. Speaker, I am pleased to take part today in this debate on Bill C-47. As it has been often mentioned, the purpose of the bill is to modernize the Excise Act. We are in a situation where all the provisions contained in the Excise Act, which Bill C-47 is supposed to replace, are included in this bill, except anything that has to do with beer.

This is important for what I will call the microbrewery industry. Microbreweries are the pride of several regions in Quebec. As my colleagues pointed out, these beers often have a different taste that has a regional character. These industries employ men and women from every region in Canada, but also from every region in Quebec.

Microbreweries are often symbols of the regions of Quebec. They are employers, they are a driving force for economic development and they are the symbol of a region. They offer consumers a product that is different from those offered by the big Canadian brewers.

The situation in which we find ourselves leads us to the conclusion that a market is developing, resulting in these microbreweries being subjected to unfair competition by other brewers. I will explain.

The beer produced by microbreweries often has to compete against so-called imported beers. Under the current taxation system, the big breweries, like Labatt, enjoy preferential treatment, a preferential tax rate, compared to the microbreweries.

The preferential rate is based on the tax rate. In Canada, there is a charge of 28¢ on Canadian beer. The rate in the U.S. is about the same, except that they have a preferential rate for microbreweries. They consider that a small business does not have the same organizational or financial structure as the big breweries. So, the preferential rate in the U.S. is only 9¢ a bottle, compared to 28¢ in Canada.

Since the tax rate for microbreweries in the U.S. is 19¢ lower than it is in Canada, it is clear that our microbreweries are the victims of unfair competition. Not only is the difference between the tax rate unfair, but microbreweries are far from being defined the same way in Canada and in the U.S.

For instance, to be considered as microbreweries, Canadian breweries have to produce 300,000 hectolitres, compared to almost 1 million hectolitres for U.S. breweries. So, the definition in itself paves the way for the unfair competition Quebec and Canadian microbreweries are victims of.

I have just mentioned the tax rate on one bottle of beer, but if we do the math, we see that for 24 bottles sold in a grocery store, the Canadian government gets $4.09, and the U.S. get $1.12, for a huge difference of $2.90 on a case of 24, which would explain why several of our microbreweries had to close their doors in the last few months and years.

Several regions in Quebec have been hurt by the loss of these small companies that can be competitive if they are given a bit of a tax break, something this bill is not doing.

In the riding of the hon. member for Saint-Hyacinthe—Bagot alone, two microbreweries have had to shut down since 1997. We have also lost microbreweries in Saint-Eustache, Baie-Saint-Paul, Montreal and Cap-Chat. Microbreweries, which have, in recent years, become ambassadors abroad for various regions of Quebec and Canada, promote regional development, in terms of growth and symbol. Therefore, these closures were major losses.

We are speaking on behalf of microbrewers, but I want to stress that the Bloc Quebecois did not fight this battle in recent weeks and months only for Quebec microbrewers. We were pleased to see that, just last week, the Canadian Alliance joined forces with the Bloc Quebecois to condemn the current federal preferential system.

We saw Canadian Alliance members ask questions in the House of Commons. It is not because the situation necessarily affects Quebec microbrewers; it is because they realized that microbreweries were in trouble in other Canadian provinces.

Here are some figures. Seven microbreweries have shut down in British Columbia, five in Alberta, one in Manitoba and one in Nova Scotia, for a grand total of more than 38 microbreweries that had to stop operating in Quebec and in the rest of Canada, in part because of the current system.

This means there are only some 40 microbreweries left in Canada. Close to half of the microbrewers had to shut down in recent years, thus leaving the market to the big breweries, such as Labatt. The result is that Quebec and Canadian consumers have only two choices: they can either drink Canadian beer brewed by a big brewery, or imported beer.

Knowing consumers, they will often choose beer from a microbrewery over imported beer, because they like local products.

We hope that the government will listen and will propose provisions to boost these driving forces of the Quebec and Canadian economy.

Excise Act, 2001Government Orders

3:55 p.m.


Réal Ménard Bloc Hochelaga—Maisonneuve, QC

Mr. Speaker, before getting into the heart of the matter, let me congratulate those who won during random draw this morning.

I also want to thank the member for Saint-Hyacinthe--Bagot for the excellent work he did on Bill C-47, a bill about taxation and particularly the excise tax. The member for Saint-Hyacinthe--Bagot and I are friends. Over the years, we have worked together, mutually respecting each other's jurisdiction.

The member for Saint-Hyacinthe--Bagot is an enlightened person. He knows that if he had not been quite alert at committee, they would have pulled a fast one on us. For our visitors in the gallery and for the people watching us, I would like to explain precisely the purpose of this debate.

I learned about the excise tax in my economics classes in cegep. I think you and I belong to the same generation, Mr. Speaker, except that you may be a couple of years older than I am. In cegep, the member for Joliette was one of my teachers. He taught me that the excise tax is paid by the consumer on a number of products.

In the early 1980s, the member for Joliette used a metaphor for his students. He used to say that the excise tax was a tax on sin because it dealt with alcoholic beverages and cigarettes, which are all associated in one way or another with luxury.

The member for Saint-Hyacinthe--Bagot, who has been on the Standing Committee on Finance for about 10 years, is an experienced member of parliament in spite of his youth. On several occasions he explained in committee that we are not against a general review of taxation. We understand that processing has changed in industry. We realize that the reality of import-export has evolved.

I would like to digress for a moment to say that Quebecers are genuine free traders who believe in international and interprovincial trade. As a matter of fact, the premier of Quebec, the member for Verchères, who, as everyone knows, will remain premier of Quebec because he is giving Quebecers a very good government, was the creator of the department of international trade in Quebec. He also gave Quebec its first international trade policy.

He pointed out that Premier Lévesque had invited him to his office and told him, “You will be responsible for international trade”. He had a very small budget then. Unless I am mistaken, it was about $9 million. This was not much to put Quebec on the map in terms of international trade.

When we had the free trade debate in Canada and Quebec in the early 1980s, Quebecers were genuine free traders. They believed that increasing trade was a sure way to promote economic growth. Even if one believes in the virtues of trade, even if one is convinced that taxation has to be reviewed and that trade is an inescapable fact of life for all nations--the member for Kamouraska--Rivière-du-Loup--Témiscouata--Les Basques, who is a fervent advocate of regional development, knows this--mechanisms to protect culture are needed.

As far as protection of culture is concerned, we understand each other, Mr. Speaker. You were on the heritage committee for a long time. You are well aware that nations must protect their culture.

Globalization is unavoidable, but sovereignty is essential. Sovereignty allows trade on an equal footing, and allows specific mechanisms to protect culture.

Do not think that there is no link between the excise tax and culture, because you would be wrong. I will explain this link.

It is a known fact that the excise tax is a tax on consumer products, which the consumer pays on a certain number of goods, such as, of course, tobacco, spirits, wine and beer.

I repeat that the hon. member for Saint-Hyacinthe—Bagot was absolutely in favour of a general review of the act. We were surprised—and when I say surprised, I mean appalled, and when I say appalled, I mean outraged, and when I say outraged, it is because, deep down, we were hurt—to see what the government did. Why did the government want to exclude the microbrewery sector from this general review?

Mr. Speaker, you will allow me to stay within the limits of parliamentary language, but I think I am beginning to smell patronage here.

We understand that members who sit on a parliamentary committee have the right to be married, to have a marital relations, to have privacy. Privacy is a right protected in major charters, both the Canadian Charter of Rights and Freedoms and the Quebec charter.

However when someone is the chair of the finance committee, it is quite different. Indeed, it seems that the chair of the finance committee was elected after a hard fought battle and has foiled Liberal strategists. This chair, who is quite a very nice person—no one questions this—is married to an influential director of one of the biggest breweries in Canada, who himself sits on the Brewers Association of Canada.

One might wonder about this. I thank the member for Saint-Hyacinthe—Bagot for his vigilance. I would like to make a link with regional development. Of course we understand that my colleague and friend, the hon. member for Jonquière, has defended regional development here on several occasions, every time she has had the opportunity to do so.

This is the situation. Of course we recognize that the big breweries, like Molson and the others, represent a relatively concentrated market. Some of them dominate the market and are trying to sink the microbreweries. If I am not mistaken, there have been more than 40 such cases already. Some of the microbreweries had to close down because of the unfair tax system and because of the rate that is applicable in the United States.

However, we have to understand that a number of microbreweries are located in regions and that they create employment. The location of an industry is an important factor. When a brewery or a microbrewery decides to set up in a region, it contributes to the development of the economic fabric of the region.

I regret to have to inform the House and all our viewers that in the area of regional development, the government's record is abysmal. I do not know how a Liberal can actually say the words regional development.

Let me give members an example. During the last election campaign—I could give members the example of the member for Beauharnois--Salaberry—the Liberal Party promised to spend $1.9 billion on the highway system. This is not peanuts. It is, however, rather unbelievable that the strategic highway improvement program only amounts to $108 million over a four year period.

It is therefore obvious that the issues of microbreweries, of culture, of regional development and of privileges in the House are all related.

In conclusion, on all these issues, Quebecers can count on the Bloc Quebecois to be looking out for the interests of Quebec to the best of its knowledge and energy.

Excise Act, 2001Government Orders

4:05 p.m.

The Deputy Speaker

Is the House ready for the question?

Excise Act, 2001Government Orders

4:05 p.m.

Some hon. members


Excise Act, 2001Government Orders

4:05 p.m.

The Deputy Speaker

The question is on the motion. Is it the pleasure of the House to adopt the motion?

Excise Act, 2001Government Orders

4:05 p.m.

Some hon. members


Excise Act, 2001Government Orders

4:05 p.m.

Some hon. members


Excise Act, 2001Government Orders

4:05 p.m.

The Deputy Speaker

All those in favour of the motion will please say yea.

Excise Act, 2001Government Orders

4:05 p.m.

Some hon. members


Excise Act, 2001Government Orders

4:05 p.m.

The Deputy Speaker

All those opposed will please say nay.

Excise Act, 2001Government Orders

4:05 p.m.

Some hon. members


Excise Act, 2001Government Orders

4:05 p.m.

The Deputy Speaker

In my opinion the nays have it.

And more than five members having risen:

Excise Act, 2001Government Orders

4:05 p.m.

The Deputy Speaker

Call in the members.

And the bells having rung:

Excise Act, 2001Government Orders

4:05 p.m.

The Deputy Speaker

The vote is deferred until Tuesday, May 21 at the end of government orders.

The House proceeded to the consideration of Bill S-40, an act to amend the Payment Clearing and Settlement Act, as reported (without amendment) from the committee.

Payment Clearing and Settlement ActGovernment Orders

May 9th, 2002 / 4:10 p.m.

Wascana Saskatchewan


Ralph Goodale Liberalfor the Minister of Finance

moved that the bill be concurred in.

(Motion agreed to)

Payment Clearing and Settlement ActGovernment Orders

4:10 p.m.

The Deputy Speaker

When shall the bill be read the third time? By leave, now?

Payment Clearing and Settlement ActGovernment Orders

4:10 p.m.

Some hon. members


Payment Clearing and Settlement ActGovernment Orders

4:10 p.m.

Wascana Saskatchewan


Ralph Goodale Liberalfor the Minister of Finance

moved that the bill be read the third time and passed.

Payment Clearing and Settlement ActGovernment Orders

4:10 p.m.

Oak Ridges Ontario


Bryon Wilfert LiberalParliamentary Secretary to the Minister of Finance

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.

Payment Clearing and Settlement ActGovernment Orders

4:20 p.m.

The Deputy Speaker

It is my duty, pursuant to Standing Order 38, to inform the House that the questions to be raised tonight at the time of adjournment are as follows: the hon. member for Selkirk--Interlake, Agriculture.

Payment Clearing and Settlement ActGovernment Orders

4:20 p.m.

Canadian Alliance

Jason Kenney Canadian Alliance Calgary Southeast, AB

Mr. Speaker, I am pleased to rise to debate Bill S-40, a bill we in my party have supported since its inception.

Last February I wrote to the hon. Minister of Finance calling on the government to introduce amendments to the Payment Clearing and Settlement Act pursuant to recommendations made by the Bourse de Montréal and others in the securities industry to make Canada's securities more competitive, particularly its options markets.

The hon. parliamentary secretary gave a technical explanation of the bill. I will engage in some of the same. In a word, the principle derivatives clearing house in Canada which is an agency of the Montreal bourse called the Canadian Derivatives Clearing Corporation, the CDCC, is at a competitive disadvantage vis-à-vis clearing houses for derivative trades in the United States because our clearing house is not protected from bankruptcy. It has not yet happened, thankfully, but if a partner to a derivative trade defaulted on payment the entire system in Canada could grind to a halt.

Given the legal opening for the entire clearance system of derivatives to grind to a halt, there is an incentive for people in the financial services industry to do trades on American exchanges where they have legal protection from bankruptcy. Such protection would be afforded by the amendments in Bill S-40.

Before I get more deeply into the technical aspects of the bill I will say that we in the official opposition Canadian Alliance object in principle to bills coming to this place which have originated in the Senate. That may seem like an exotic concern to some. However as long as we continue to have an undemocratic, unrepresentative and unaccountable upper chamber it is important that legislation is initiated in the House by the people's representatives and sent to the other place for approval.

Every time a bill comes to this place that is initiated in the upper chamber we indicate our displeasure. We sometimes oppose a bill on those grounds. We will not do so in this instance because Bill S-40 would be an important reform of the financial services sector.

While Bill S-40 is a useful and valuable amendment we will support, much more needs to be done in the area of reforming Canadian securities laws. I submit to the consideration of my colleagues a report recently released by the Vancouver based Fraser Institute and conducted by Dr. Mohindra, formerly of the Department of Finance. The report is an overarching review of securities law in Canada. In it Dr. Mohindra compellingly concludes that Canada has more burdensome, costly and redundant securities regulations than virtually any of our major economic competitors.

Dr. Mohindra concludes, and I concur, that governments in Canada, principally the provincial governments which are responsible for regulating securities exchanges but also the federal government to the extent it is responsible, ought to get together with the four major exchanges in Canada to come up with a much more streamlined and efficient system of securities regulation.

This is not a technical matter of abstract interest only to those in the financial services industry. To the contrary, the capital markets which operate in and through the various stock exchanges and through the derivative exchanges at the Montreal bourse are an essential part of our modern economy.

Essentially these modern capital markets represent the central energy of a free market economy; that is to say, the formation of capital. Virtually no business could begin, operate, conduct its business, employ people or create wealth were it not for the availability of capital. Formation of and access to capital is an essential aspect to being a competitive economy.

We have had an ongoing debate about ways to make the Canadian economy more competitive and about the fact that under the government's tenure we have seen our economic competitiveness slide vis-à-vis our major economic competitors. We have seen the average disposable income of Canadian families decline over the past 20 years in relative terms. We have heard the former minister of industry, now the hon. Deputy Prime Minister, explain that the average family in Ontario has a lower standard of living in relative terms than the average family in Mississippi, the poorest of the 50 U.S. states. Canadian families now have on average $20,000 less in disposable income than the average American family. These are all reflections of our diminishing competitiveness and productivity.

We in the Canadian Alliance frequently propose policy solutions to the problem through rapid and meaningful reductions in tax rates to increase incentives for people to work, save and invest. We talk frequently about accelerating debt reduction so our governments, particularly the federal government, waste fewer public resources on the sink hole of debt servicing. We also talk about deregulation in general.

I am raising this matter with particular reference to our capital markets. One idea which is gaining currency is the notion of establishing not a federal but a national securities regulator which would obviate the need for 10 separate securities regulatory bodies. Under the status quo each province has a separate securities and exchange commission each of which is responsible for administering rules regarding the filing of prospectuses for new companies.

Let us suppose a successful restaurateur in Regina wanted to branch out and start a chain of restaurants across the country like my hon. friend from Regina--Qu'Appelle who is a very successful capitalist. Let us suppose one wanted to raise capital to expand the business. One might want to issue a prospectus to raise equity on, say, the Toronto Stock Exchange, the Bourse de Montréal or the exchange in western Canada, but to do so would require filing the prospectus in 10 jurisdictions many of which have completely different regulations. It would cost tens of thousands of dollars in legal fees. The only winners in the current system are securities lawyers who derive great profit from the multiplicity of securities regulations in Canada.

It would be much more efficient for an ambitious restaurateur wanting to raise equity to have one stop shopping in terms of raising equity on the capital markets through one national exchange such as exists in the United States. The U.S. is a federation like our own in many respects but it has recognized since its inception the value of a single national securities and exchange commission which removes the kind of duplication we have in Canada.

Germany, a federation like Canada which is a major competitor of ours, has a single national securities commission. The United Kingdom which is admittedly a unitary state has one commission for overseeing the operation of equity markets.

I join with virtually every major organization in the financial services industry in Canada, including the Toronto Stock Exchange, in calling for all governments, all of the commissions across the country and all stakeholders to discuss how we could render more efficient the operation of these equity markets .

The bill provides an improvement in the legislation which will protect those who make trades through the Canadian Derivatives Clearing Corporation of the Bourse de Montréal. It will give them a certain degree of stability and security which they currently lack.

Mr. Luc Bertrand, president of the Bourse de Montréal, provided testimony to the Standing Committee on Finance. He told us the “CDCC is the clearing house for the bourse. This means that it makes sure the buyer pays the amount he has agreed to pay. The seller receives payment, and both meet their obligations under the derivatives contract that they have traded.

The CDCC is a wholly owned subsidiary of the bourse. It is the guarantor of interest rate equity and indexed derivative contracts traded on the bourse. As such, the CDCC requires each of its members to maintain margin deposits to cover the market risks associated with each member's position. CDCC members must post collateral to mitigate the risk of insolvency”.

As he pointed out, the bourse competes for this service principally with the Chicago Board Options Exchange which is a branch of the Chicago Mercantile Exchange.

Mr. Bertrand pointed out that there is a certain benefit for Canadian companies wishing to trade derivatives to trade through the CBOE as opposed to Canada's own derivatives clearing corporation.

This is a multibillion dollar industry. This is not some small corner of the financial services industry. This is an enormous and growing part of the capital markets, so we ought to be doing everything we possibly can. That is what Bill S-40 seeks to do.

Bill S-40 would essentially give investors who are trading derivatives the confidence that they will not be risking their investment through no fault of their own if the derivatives clearing corporation is shut down because of a call on trades or because of a court bankruptcy order.

The official opposition supports the bill. We have helped to expedite the bill at all stages. I certainly hope all members of the House will be doing so. I commend the Bourse de Montréal and Mr. Bertrand in particular for their excellent work in presenting this idea to the government and to all parliamentarians, and for the excellent work they are doing in modernizing and rendering more efficient Canada's capital markets.

Payment Clearing and Settlement ActGovernment Orders

4:35 p.m.


Yvan Loubier Bloc Saint-Hyacinthe—Bagot, QC

Mr. Speaker, I was just in the process of talking about my eminent colleague, the member for Hochelaga--Maisonneuve and the values of Bill S-40, but also the debate surrounding the prospects of creating a Canadian securities commission.

Before going to the core of the bill, which the Bloc Quebecois will support, please allow me to digress for a moment. With respect to the Canadian securities commission, my colleague from the Alliance mentioned that there was almost unanimous support in Canada to harmonize, streamline and have one single organization regulating securities.

I would like to inform him, for his own education, that Quebecers will oppose the creation of a Canadian securities commission. Why? Because the Quebec securities commission was recently reorganized as an organization to oversee the entire financial sector. We are approximately fifteen years ahead on the evolution and streamlining of the financial sector, and approximately ten years ahead on what was known as the interaction between financial sector segments.

We did not do all of this to start a debate, or because certain Canadian provinces lag behind Quebec when it comes to integrating and monitoring the financial market as well as monitoring those who enter it, leave it and make securities transactions. We will never accept—this is an old debate that resurfaces every two years—the creation of a Canadian securities commission to replace all of the securities commissions that exist in Canada.

Incidentally, the only person who has fought hard to have this Canadian securities commission has been the president of the Ontario Securities Commission. At that time, he knew very well that if a Canadian securities commission were created, he would be the one to run this commission and that Ontario would wind up calling the shots for the entire securities sector in Canada.

My Liberal and Canadian Alliance colleagues will find their way blocked by Quebecers ready to fight to the last to hang on to the securities sector, which is the exclusive jurisdiction of the provinces, and which we want to jealously guard for ourselves in Quebec.

The government is all too ready not to respect the Canadian constitution in this area, by pointing to how wonderful it is when it suits it to respect jurisdictions, but by ignoring them when it comes time to promote federal government policies, which consist in further centralizing all powers and forgetting about the Canadian constitution.

Let us now come back to Bill S-40. Like my colleague, I am not happy about the fact that this bill originated with the Senate, not for the same reasons, because the Senate is not elected, but not from the same perspective as the Canadian Alliance.

In our view, the Senate should be abolished, and all bills of importance such as this one should originate with elected representatives, who have specific mandates from all segments of the population to do this kind of work. We are never happy when a bill originates with the Senate because the Senate is made up of people who are appointed, who represent no one but themselves. We could have done this work as elected representatives accountable to the public and accountable for the smooth operation of the financial industry, which is what Bill S-40 is about.

Nonetheless, we are going to support this bill, because it is of great importance. We spoke particularly about securities, but also about the whole question of collateral, which will now go to those conducting the transactions in the derivatives sector, and which will give the Canadian Derivatives Clearing Corporation, a subsidiary of the Montreal Stock Exchange, a legal means of protecting those who buy and sell these products.

Right now, when someone buys derivatives from Canadian corporations, there is no legal guarantee that he will ever actually be paid. No legal guarantee exists.

Nowadays, with globalization, the free movement of capital and the fact that, in North America, the derivatives market is extremely competitive, stock exchanges in the U.S. offering legal guarantees can attract investors who will buy derivatives from Canadian societies. The Chicago Stock Exchange is not the only one. All the stock exchanges in the U.S. dealing with derivatives, because they offer legal guarantees against bankruptcy or default of payment, can be appealing for investors who otherwise would do their transactions at the Montreal Exchange, the only one in Quebec and in Canada that specializes in derivatives.

Bill S-40 rectifies that situation from a legal standpoint and provides that the Canadian Derivatives Clearing Corporation, a wholly owned subsidiary of the Montreal Exchange, will now be able to offer a legal protection similar to what we see in the United States and elsewhere in the world.

We will support this bill. This new protection will be an additional marketing and publicity tool for the Montreal Exchange to attract investors, potential derivative buyers, and sellers of course.

Once Bill S-40 is passed, and I think most of my colleagues here will support this legislation, promotion for derivatives provided by the Montreal Exchange will increase.

With supply and demand for derivatives rising, the Montreal Exchange will speed up capital projects through online transaction services. Among additional benefits, jobs will be created for highly skilled workers in the financial sector.

Free flow of capital at the international level has led to increased mobility for highly skilled workers in the securities sector and other related fields. In the past, many of our highly skilled workers have left for the United States and even for some European countries. Creating greater opportunities and having the Montreal Exchange specialize in derivatives can only make for a better future in this area as well as better prospects for the highly speciallized jobs the bill is bound to give rise to. For all these reasons, my colleagues and I will be supporting Bill S-40.

However, this support comes with the warning that I gave earlier regarding any attempt to go further on the part of the federal government, that is any attempt to establish a Canadian securities commission, as it has been trying to do for the last 12 years. This would be totally unacceptable in Quebec, especially since securities come under the exclusive jurisdiction of Quebec and the other provinces. If the other provinces want such a commission, Quebec certainly does not.

Over the last 15 years, we have done a lot to modernize the financial sector in Quebec. We even created an organization that oversees the whole financial sector. It regulates it, monitors it and sets standards and rules.

Quebec will certainly not let the federal government try to go down that road again. Based on the comments made by my Canadian Alliance colleague, it is obvious he was visited recently by people promoting the creation of such a commission.

There is a warning that I must put on the table right away. If the federal government intends to come back with this idea that we have fought in the past, it will find us in its way, as well as the Government of Quebec and Quebec's whole financial sector. In the meantime, we will support Bill S-40.

Payment Clearing and Settlement ActGovernment Orders

4:45 p.m.


Lorne Nystrom NDP Regina—Qu'Appelle, SK

Madam Speaker, I, like my colleague in the Alliance, the member for Elk Island, object to this bill originating in the Senate. The Senate is unelected, undemocratic and unaccountable.

I remember the day when many Liberal Party members themselves would have objected to legislation originating in the Senate but now they are very supportive of this because half of them, including the member for Gatineau, want to become senators some day, which is why we do not hear very much on this from the Liberal Party.

Other than that, we do support the legislation before the House today. All members of the finance committee, as far as I know, are in support of the bill which was talked about a great deal before it was introduced in the other House.

Bill S-40 would amend the Payment Clearing and Settlement Act to permit securities and derivative clearing houses to realize the collateral of a member, for example, the deposit of a commodity, security or currency contract that the clearing house may enter into in the event of the bankruptcy or the insolvency of the member. Therefore if there is a bankruptcy or insolvency there is some collateral there for the clearing house. This would make it easier for the clearing houses to act more efficiently and provide more economic security for our economic system.

Canadian securities and derivatives clearing houses enable consumers and businesses to buy and sell securities and derivatives in a timely manner and at a reasonable cost. They do this by providing clearing and settlement services and acting as a central counter party to securities and derivatives trades.

The bill has been the result of extensive consultations with officials from the clearing houses in the country. There are three different clearing houses in Canada, as well la Bourse de Montréal, the Montreal stock exchange. I know the finance critics from all parties were consulted well ahead of this, before the bill was even in the drafting phase a number of months ago.

The bill has only one clause and that clause was expedited through the Senate in two weeks or less. The committee stage in the Senate lasted about one hour. There were no amendments by the Senate banking committee and subsequently Bill S-40 was reported with no amendments by the Standing Committee on Finance here in the House of Commons.

Although we in the NDP oppose the principle of unfettered speculation, and we are no friends of most of the derivative activity that takes place today, we can say that there are some good and bad derivatives. The good derivatives may help hedge corporate treasuries against the risk of security price changes and currency fluctuation risks. Bad derivatives are about gambling and what I call the casino capitalism that we see in many parts of the world. Speculation among derivatives allow a gambler, be it a corporate entity or an individual, to make a bet on the future price of an underlying asset by betting just a fraction of the cost of the asset.

The leverage comes about because the derivative instrument basically replicates borrowing and lending of the underlying asset without ever having to physically own the asset. We have seen many examples where individuals get into a great deal of trouble through leveraging and buying on margin. Companies do the same thing. When there is a downturn in the economy of a particular commodity or in a particular industrial sector then all kinds of problems can result as a consequence.

We support Bill S-40 because the legislation would reduce the systemic risk by containing the impact of bankruptcies on the securities and derivatives clearing system. It would also enhance the stability of the financial system by enabling securities and derivatives clearing houses to immediately realize assets pledged as collateral in the case of a default or bankruptcy by one of the members of a clearing house. This would guarantee a swift payment of collateral to clearing houses and would protect the stability of the system. Bill S-40 does it by taking a shortcut to override all other federal bankruptcy legislation. We have in the statute of this country many pages of bankruptcy regulations.

In addition, the mainstream are already in favour of Bill S-40. They say that the legislation would put Canada on a level playing field with the United States, with our partners in the G-8 and with our European partners, and would increase Canada's financial competitiveness and its ability to attract capital.

The main beneficiary of the legislation would be the Montreal stock exchange, the Bourse de Montréal, which also clears derivative transactions for the Winnipeg Commodity Exchange. The Montreal exchange, as the House knows, specializes in futures.

It is very important for the Montreal Stock Exchange. I discussed the bill with the president of the Montreal Stock Exchange on two or three occasions.

The explosion in derivatives has resulted in a shift to less transparent and less public, over the counter markets. In fact this lack of transparency has seen a real growth in the over the counter markets in the last seven or eight years.

In 1995 some $64 trillion U.S. were traded over the counter. In 1997, it went from $64 trillion to $360 trillion. In the latest figures from 2001, the marketing now of over the counter sale of stocks and other financial commodities has gone well over the $1 trillion mark.

This causes a major regulatory problem. Regulators increasingly have a hard time being aware of the data on the volume of derivative activity and the extent of the risk. I will give a couple of examples of what is meant by that.

The Enron fiasco, which is the largest bankruptcy as far as I know anywhere in the world, was partly due to the fact that derivative transactions were booked between private parties and not through public, transparent and fully regulated clearing systems, plus of course the failures of the auditors, which was Andersen Consulting. The bankruptcy was to the tune of some $110 billion, which has had ramifications throughout the system. Even in our country there is some concern about the bankruptcy of Enron in terms of some of our large corporations but also Andersen accounting.

Just the other day I asked the Governor of the Bank of Canada why the bank still retained Andersen's accounting services and he of course told me that he had confidence in Andersen's Canadian partner, its Canadian wing. Hopefully that is the case.

The other example is the massively leveraged hedge fund known as the long term capital management fund or LTCM. This fund had bet a substantial amount on the world's economy, on the future narrowing of interest spreads over U.S. treasuries. By mid-1998 the fund had about $4 billion in equity capital and borrowed funds of $120 billion, a hefty leverage of about 30 times.

Amazingly that leverage was compounded by another tenfold by the fund's off balance sheet derivatives' exposure amounting to more than another $1 trillion. In the end, a consortium of private banks, led by the federal reserve of New York, bailed out the fund and no public money in this case was actually involved.

The truth of the matter is that we do not really know the long term consequence of derivative wizardry and the real implications as to the economy. However financial deregulation has expanded the investment horizon of private investors but it has also created new systemic risks without really improving the access to affordable capital loans, which is one of the critical requirements for sustainable development that we certainly need in the world today.

The increasing poverty of so-called emerging countries is a case in point. The disciplining effects of the markets adjusting to speculative derivative bursts contribute to deflation, which hurts the weakest and most vulnerable countries and people in the world. Decades of development and efforts can be wiped out in a moment.

What is the key? I suggest the key is to obtain a regulatory environment and a system that would mandate a transparent, standardized, accountable and strict regulation of off-balance sheet items such as derivatives. All derivative products should fall under the same regulation and the same regulation, not just in Canada and the United States but indeed around the world. If we do not do something about that we will continue having problems. As we have large investment banks and wealthy investors speculating with other people's money we will see the continuing underdevelopment and poverty of many people in the world.

Financial speculation in the world is growing continually. The trade in currency is over $1.5 trillion in terms of U.S. dollars. About 90% of that trade in currency is purely for reasons of speculation. When we have that kind of speculation we end up with a system and a vision where poor people in poor countries are deprived of their fair share of resources and the wealth of the planet.

We have made a suggestion. I had a private member's motion in March 1999 which would have introduced a small tax on the speculation of currency, the so-called Tobin tax named after the late James Tobin who passed away a couple of months ago in the United States. Mr. Tobin had won a Nobel prize.

If we introduced a small tax, say 0.1% or 0.2% of each transaction, that tax would have two effects. First, it would slow down the speculation that is carried on mainly by investment bankers but also others in the world. It would also create a huge international development fund of several tens of billions of dollars each year, amounting very quickly to hundreds of billions of dollars. We could use that development fund as a modern day Marshall plan for the development of places, such as Africa and Afghanistan, third world countries, into a vision of helping them help themselves economically. This would be similar to what was done after the second world war in Europe when the Marshall plan was put into effect.

Those are the kinds of things that could be done if we had some regulation of the international financial market. We are suggesting that the bill before us today is a bill that is very short and not controversial. It brings a little bit more order and rationale to the clearing house system and to the payment and settlement system in our country. It affects the three clearing houses. It affects the Bourse de Montréal, the Montreal stock exchange. It is a bill we can all support in the House as a small step forward to a more rational economic system.

Payment Clearing and Settlement ActGovernment Orders

4:55 p.m.

Canadian Alliance

Inky Mark Canadian Alliance Dauphin—Swan River, MB

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.