Skip to main content

A group of 48 asset managers that together hold $850-billion in bonds are warning that two rules are stifling access to debt markets.Getty Images/iStockphoto

Recent securities regulations are making it more arduous – and, at times, impossible – for large Canadian institutions to buy and sell some bonds, prompting calls for reform.

A group of 48 asset managers that together hold $850-billion in bonds are warning that two rules are stifling access to debt markets, in particular the bonds of Canadian companies issued in U.S. dollars. Also affected are new offerings of foreign securities that are being sold to wealthy buyers outside public markets.

As Canada's regulatory regime has evolved and, in some cases, become more onerous, many American investment dealers have reduced their trading operations in Canada. That hurts Canadian institutional investors that are trying to build diversified portfolios for ordinary Canadian clients.

"Sourcing bonds has always been challenging but with both rules, it has become even harder and the costs could go up," Marc-André Gaudreau, the head of fixed income at 1832 Asset Management LP, said in an interview. "The market is really strong right now and companies are able get access to capital without help from [investors in] Canada," he added.

In a recent letter to provincial securities regulators, the Canadian Bond Investors' Association (CBIA) said its members are having difficulty trading and tracking the debt of Canadian companies issued in the U.S. market, such as the bonds of Valeant Pharmaceuticals International Inc. and Bombardier Inc.

That's because many foreign banks, including Goldman Sachs Group Inc. and Citigroup Inc., have stopped trading Canadian bonds with Canadian investors in the U.S. secondary market, the CBIA letter states. The reason derives from a 2015 amendment that prevented foreign investment dealers from being classified as both an exempt-market dealer and an international dealer.

The CBIA's second concern pertains to the regulators' bid to better track the sales of bonds and stocks sold without a prospectus. The change, introduced June 30, requires banks to collect more details about the issuer and the Canadian purchaser. Then, it requires a banker to certify its accuracy, creating new personal liability risks.

"It's going to become more expensive and time-consuming to sell into Canada," said Anthony Spadaro, a lawyer at Davies Ward Phillips & Vineberg LLP.

"I am not so sure that everyone will think that it's money well spent. The [U.S.] banks are of the view that if we do not need to sell into Canada to fill our books, why do we need to ask our people to take on this personal liability?"

Lawyers say they've been fielding calls from buy-side clients that have been locked out of new private offerings in the United States because American dealers have been balking at the new reporting rule. The lawyers worry that Canadians will have less access to new issues in the U.S. exempt markets.

"Once the deal flow starts picking up near the end of the month, there's going to be a lot more squawking [from investors] if deals aren't offered in Canada," said Andrew Parker, a lawyer at McCarthy Tétrault LLP.

The CBIA's letter urges the Canadian Securities Administrators (CSA), an umbrella organization for the country's 13 securities regulators, "to move quickly and decisively" to rectify the issues.

"Perhaps [regulators] need to rethink the rationale behind these regulations," said Ian McKinnon, the co-chief investment officer at Addenda Capital Inc. and the chair of the CBIA. "Maybe it's just a tweak or telling the U.S. dealers: 'That's not what we meant.' "

Regulators are searching for solutions.

"CSA staff are engaging with these stakeholders and are working expeditiously to address the concerns they have raised," the organization said in a statement.

Report an editorial error

Report a technical issue

Editorial code of conduct

Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 28/03/24 11:59am EDT.

SymbolName% changeLast
C-N
Citigroup Inc
+0.45%63.03
GS-N
Goldman Sachs Group
+0.34%416.68

Interact with The Globe