OSFI has issued an update to its guidelines for recognizing innovative Tier 1 capital instruments under new accounting rules.

Among other things, the update requires that a Special Purpose Vehicle (SPV) issuing innovative instruments be consolidated with the federally regulated financial institution (FRFI) for those instruments to be recognized as Tier 1 capital of the FRFI.

New accounting rules may affect the ability of FRFIs to consolidate the SPVs in innovative structures that have been accepted in the Canadian marketplace. Accordingly, OSFI has decided to issue an advisory to clarify its intended approach to the recognition of those innovative structures.

OSFI confirms that all qualifying innovative Tier 1 instruments outstanding as of June 30 will continue to receive innovative Tier 1 regulatory capital treatment, regardless of the final accounting effects of new rules. However, this does not restrict OSFI’s ability to reconsider the recognition of these instruments in the light of other accounting, tax or regulatory guidance that may be introduced in the future.

It suggests that FRFIs interested in raising Tier 1 capital in the form of innovative instruments consider the potential impact of the new rules on the ability of those instruments to qualify as Tier 1 capital. OSFI says that it is prepared to work with those FRFIs and their advisors to consider any modifications that may be required to innovative structures that have been accepted to date by OSFI and industry stakeholders.