The Canadian Office of the Superintendent for Financial Institutions has proposed major changes to its securitizations regulations that would move the regulatory regime more in line with European and U.S. practices.

OSFI issued a draft regulatory framework for asset securitization transaction that applies to all federally regulated financial institutions on an enterprise-wide basis. OSFI has asked for comment until March 19.

OSFI says the changes:

  • introduce a more flexible approach in the capital treatment of securitization transactions by adopting aspects of rules already in place in other countries that are consistent with the proposed Basel II approach, for example, servicer advances, clean-up calls, and ratingsbased approach;
  • make improvements suggested as part of the results of OSFI’s 2001 Asset Securitization
    Review, for example, providing Liquidity Facilities, and Liquidity Asset Purchase Agreements;
  • and address industry comments and enquiries, for example, by providing a definition of market disruption, and by specifying the capital treatment for a FRFI as an investor in the most senior tranches.



Moody’s Investors Service says that among the proposed changes are, for the first time, a clear definition of a market disruption “that would permit an ABCP conduit to access its liquidity backup facilities.”
The new regulations also allow for pool-specific liquidity support by means of asset purchase agreements as is common in the United States.
“This ability to draw on liquidity support will exist regardless of whether the disruption affects the entire market or just a single ABCP conduit,” Moody’s managing director for Canada Andrew J. Kriegler says in a statement.

The proposed revisions also update the capital treatment of various securitization exposures held by financial institutions based on the external ratings assigned to those exposures. The ratings-based approach will generally be permitted for senior tranche investments or for second or subsequent loss facilities. This will move OSFI broadly in line with the regime first adopted by U.S. regulators in 2001.

“Importantly, as a result of this ratings-based alternative for senior exposures, the difference between a qualifying liquidity facility and a rated traditional liquidity facility will now be a matter of capital charges (0% vs. 20% risk weight) rather than the difference between permitted and forbidden,” Kriegler says.

As a result, Canadian ABCP sponsors may also be able to structure conduits with the same type of liquidity as is common in international markets, albeit perhaps at a greater cost, the managing director notes.

In a third change, the guideline responds to a long-standing concern of the Canadian market and would permit financial institutions acting as servicers to advance on delinquent assets, but only in limited circumstances. “If adopted, the guideline will result in greater consistency between Canada and the United States in the regulatory treatment of many securitization-related activities. In addition to leveling the playing field to a certain extent, the guideline also paves the way for evolutionary rather than revolutionary change when the Basel II regime comes into force, at least as it pertains to the treatment of securitization,” Kriegler says.

Kriegler says that while OSFI has not specified a target implementation date, the short comment period suggests that the final guideline will probably take effect by the beginning of the banks’ next fiscal year Nov. 1.