The Office of the Superintendent of Financial Institutions is bolstering disclosure requirements for so-called innovative Tier 1 capital instruments.

OSFI has issued an advisory that updates existing guidance related to innovative Tier 1 instruments, updating that existing guidance in two areas:

> enhanced disclosure requirements are being introduced for qualifying asset-based and loan-based innovative Tier 1 instruments issued after July 1; and

> a new form of loan-based qualifying innovative instrument is being considered for inclusion in Tier 1 capital.

In addition to existing disclosure requirements, OSFI expects that banks will, for certain innovative instruments issued after July 1, “provide prospectus-level disclosure at issuance to ensure the main features of the innovative instruments and the structure of the issue are transparent and easily understood by investors, including all relevant risk factors.” Also, in the case of material changes, OSFI expects the bank will provide additional disclosure on a timely basis.

For asset-based instruments, it adds that banks should, at issuance and on at least a quarterly basis, provide prospectus-level disclosure of any material information that will assist investors in understanding the risks of the underlying trust assets, including: a breakdown of the assets by type (i.e., residential mortgage, mortgage backed security, etc.), the geographic distribution of the assets, information on the creditworthiness of obligors and guarantors, a description of collateral and a description of the average maturities of the assets.

The new form of loan-based instrument that is being considered for inclusion involves a special purpose vehicle issuing an innovative debt security to investors and the SPV using the proceeds to acquire an inter-company debt instrument from the bank with maturity conditions that are the same as the public issue. The bank will be permitted, in lieu of cash, to pay interest and/or principal on the inter-company instrument issued to the SPV in preferred shares under specified circumstances. These preferred shares may then be used to satisfy interest and/or principal payments to investors in the SPV securities.