CSA narrows focus of ABCP reforms

According to the CSA’s notice proposing the changes, its amendments would, among other things: alter the requirements of the short-term debt exemption; exclude securitized products, such as ABCP, from the exemption; and, create a new exemption that would only be available for ABCP backed by traditional assets.

With today’s proposals, the CSA is backing away from an earlier set of reforms that were crafted in response to the failure of the non-bank ABCP market back in 2007. Among other things, those proposals would have restricted the availability of securitized products to highly-sophisticated investors, via exemption; imposed new disclosure requirements for prospectus offerings; and, set additional disclosure and certification requirements for reporting issuers that distribute securitized products.

The CSA has now decided not to go ahead with those proposals, and is instead proposing “a more targeted set” of amendments that include certain aspects of the original proposals. In its notice, the regulators indicate that, after receiving feedback on those initial proposals, and carrying out additional consultations, they have decided that the comprehensive reforms they initially sought are not necessary, given the risk involved.

“In our view, 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 says in its notice.

While the financial crisis revealed the systemic risk posed by securitization markets, these concerns are mitigated in Canada for a couple of reasons, it says, noting that: most Canadian securitized products are guaranteed by the government, and based on underlying residential mortgages that are also insured by the government; also, the private-label securitization sector in Canada is small, conservative, and largely subject to prudential oversight.

Additionally, it says that, apart from the 2007 crisis, “Canadian securitized products do not appear to raise greater or different investor protection concerns than other types of complex structured securities such that a product-specific set of rules is justified.”

Moreover, it says that market practices have changed since the crisis. “Post-financial crisis, non-bank ABCP is no longer being issued; while conventional ABCP conduits are providing better disclosure to investors and have effective liquidity support provisions in place,” it says.

The CSA also says that the Canadian market appears to relatively free from the types of misaligned incentives that facilitated excessive leverage and maturity mismatching in the financial system before the financial crisis. As a result, it’s not proposing mandatory credit risk retention; adding that there should be clear disclosure on risk retention and how transactions have been structured to align the economic incentives and interests of the players in a transaction with investors.

Next: A separate prospectus exemption for short-term securitized products
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A separate prospectus exemption for short-term securitized products

While the CSA has backed off from the comprehensive approach in the 2011 proposals, it does say the 2007 market disruption “demonstrates the need for changes to how short-term securitized products such as ABCP are distributed on a prospectus-exempt basis.” As such, it has decided that there should be a separate prospectus exemption for short-term securitized products with conditions that take into account their particular characteristics and risks; and, reflect improved market practices post-financial crisis.

The new proposals are intended to “address certain investor protection and systemic risk concerns raised by certain types of complex ABCP”, the notice says. And, they will allow the regulators to collect information on distributions of securitized products made under other prospectus exemptions, such as the accredited investor exemption, it notes.

The CSA is also proposing amendments that would modify the credit ratings required to distribute short-term debt, which is primarily commercial paper (CP), under the short-term debt exemption. These changes aim to remove the regulatory disincentive for some CP issuers to obtain an additional credit rating; provide consistent treatment of CP issuers with similar credit risk; and, maintain the current credit quality of CP distributed under the short-term debt exemption.

“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,” said Bill Rice, chair of the CSA and chair and CEO of the Alberta Securities Commission (ASC).

The proposals are out for a 90-day comment period, until April 23.