The Investment Industry Regulatory Organization of Canada (IIROC) today released its report on the liquidity crisis involving third-party asset-backed commercial paper (ABCP) in Canada.

“Our objectives in producing this study are to articulate consistent standards expected of IIROC member firms”, says IIROC CEO and President Susan Wolburgh Jenah.

“In seeking to understand and draw lessons from the ABCP crisis, our goal is remedial and preventative. The study contains recommendations, findings and best practices which, effectively implemented, will promote compliance with these standards and help to reduce the risk of a repeat of the difficulties encountered by dealer firms and their clients during the third-party ABCP liquidity crisis,” she says.

In order to understand the role of IIROC-regulated investment dealers in the manufacture and distribution of third-party asset-backed commercial paper, the study examines the evolution of ABCP, the differences between traditional bank-sponsored ABCP and third-party ABCP programs and the role of other market participants including federally regulated financial institutions, credit rating agencies and special purpose issuers of third-party ABCP.

The total amount of third-party ABCP sold to approximately 2,542 non-corporate retail clients by dealer members was $372 million, just over 1% of the total third-party ABCP market, before the crisis came to a head in August 2007.

IIROC says the compliance reviews, which formed the basis of the study revealed inadequacies in dealer firms’ product due diligence processes.

The report makes several recommendations relating to product due diligence including product transparency, conflicts of interest, and dealer use and disclosure of credit ratings.

IIROC has regulatory responsibility for Canadian investment dealers and the report’s recommendations only apply to IIROC-regulated firms.

The SRO says the study should be considered in conjunction with reports recently issued by other regulators including the Canadian Securities Administrators (CSA) and the Office of the Superintendent of Financial Institutions (OSFI), which contain recommendations for broader regulatory reform.

IIROC is also issuing a draft guidance notice to dealer firms on “Best Practices for Product Due Diligence”

The SRO says the notice has been developed to assist dealer firms in meeting IIROC’s expectations regarding the assessment and introduction of products to be sold to institutional and retail customers.

IIROC is requesting comment on the draft notice.

IE