Files fill office space rented in 2009 to hold legal documents required to implement the ABCP restructuring. Canada’s $32-billion market for non-bank ABCP collapsed in the summer of 2007.Tibor Kolley/The Globe and Mail
Canada's securities regulators have scrapped a set of proposed new rules to govern the sale of asset-backed commercial paper and have unveiled a streamlined new proposal that focuses more narrowly on the highest-risk products.
The change in direction on ABCP rules comes almost seven years after the meltdown of Canada's $32-billion market for non-bank ABCP products in the summer of 2007 and after years of review by regulators to determine what needs to be done to protect investors from similar risks in the future.
In 2011, the Canadian Securities Administrators (CSA), an umbrella group for Canada's provincial securities commissions, published a proposal to place new restrictions on the sale of all securitized financial products, including ABCP, to unsophisticated investors. The rule was intended to cover a variety of securitized debt instruments beyond ABCP because regulators said there should be consistency of rules across the array of products.
In a new proposal published Thursday, however, CSA said the market for non-bank ABCP products has disappeared following the collapse in Canada since 2007, and said traditional lower-risk ABCP products being issued by various institutions now have better disclosure to investors and are backstopped by good liquidity-support provisions.
"With the exception of non-bank ABCP (that is no longer being issued), securitization activity in Canada currently does not raise systemic risk or investor-protection concerns that warrant the type of comprehensive regulatory intervention contemplated by the 2011 proposals," the CSA said in its new rule disclosure Thursday.
Instead, the CSA said "conventional or traditional" ABCP products will be allowed to be sold in the exempt market without issuing a prospectus, while more complex hybrid or derivative-based products of the type involved in the market meltdown in 2007 cannot be sold without a prospectus.
The CSA will also introduce various conditions relating to credit ratings, liquidity, underlying asset pools and continuing disclosure. It also published new amendments for the credit-rating requirements for issuing corporate commercial paper (CP).
In a statement Thursday, CSA chairman Bill Rice, who is also chairman of the Alberta Securities Commission, said the new rules weigh the risks of various products.
"These amendments reflect a tailored approach to differing investor protection and systemic-risk concerns related to Canadian CP and ABCP while continuing to advance efficiency and fairness in the capital markets," he said.
The prior rules in 2011 would have created a new category of accredited investor who could buy securitized debt instruments without a prospectus, limiting sales to institutional investors or wealthier individuals. The proposal was intended to address concerns that non-bank ABCP products were sold to hundreds of unsophisticated retail investors before the market freeze-up in 2007.
However, the CSA said Thursday that its rule changes include scrapping the proposal to create the new category of eligible securitized products investor.
Securitized products supply income to investors from a pool of underlying financial assets such as mortgages, credit card receivables or auto leases. In 2007, however, investors discovered many ABCP pools were not backed by real assets and relied on far more complex derivative instruments, or were backed by higher-risk assets such as U.S. subprime mortgages.
Non-bank ABCP is no longer being issued in Canada. The market now largely consists of bank-sponsored ABCP products that hold assets such as mortgages, home equity lines of credit, and car loans.
Janet McFarland