The Canadian Securities Administrators (CSA) recently released two notices on the implementation and regulation of the Canadian bail-in regime, namely:
- CSA Staff Notice 46-309, in connection with the regulation of Bail-in Debt (as defined below); and
- CSA Staff Notice 81-331, in connection with the implications of the bail-in regime on investment fund issuers, subject to National Instrument 81-102 Investment Funds (NI 81-102).
According to the Office of the Superintendent of Financial Institutions (OSFI), the bail-in regime applies to Canada’s domestic systemically important banks (D-SIBs) which includes all of the six largest domestic Canadian banks. The details of the bail-in regime are set out in the regulations under the Bank Act and the Canada Deposit Insurance Corporation (CDIC) Act that will come into force later this month, precisely on September 23, 2018 (Regulations). As stated in our previous post, under the Regulations, if OSFI believes that a D-SIB has ceased, or is about to cease, to be viable, the CDIC may take temporary control or ownership of the D-SIB and convert all or a portion of the D-SIB’s bail-in debt (Bail-in Debt) into common shares of the D-SIB.
CSA Staff Notice 46-309 – Regulation of Bail-in Debt:
The CSA confirms that the introduction of the bail-in regime is not retroactive. A D-SIB debt issued before the effective date of the Regulations would not be subject to bail-in, unless an instrument issued before September 23, 2018 is amended on or after that day to increase its principal amount or extend its term to maturity. In other words, a D-SIB with outstanding unsubordinated debt securities issued both before and after September 23, 2018 would have multiple types of “unsubordinated debt” that would carry different levels of risk of loss.
The CSA further notes that:
- there is an important distinction between holding Bail-in Debt compared to non-Bail-in Debt in terms of investment risk;
- compliance with know-your-client (KYC), know-your-product (KYP) and suitability requirements under National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registration Requirements (NI 31-103) is a critical aspect of investor protection; and
- the risks of owning D-SIB Bail-in Debt include the risk that a determination of non-viability of a D-SIB by federal authorities could lead to the conversion of all or a portion of a D-SIB’s Bail-in Debt into common shares.
The CSA confirms that if it becomes aware of any distributions or trades of Bail-in Debt by persons or companies in the business of trading in securities that are being made to investors located in Canada that are not being made either: (i) by or through a registered dealer (in accordance with investor protection requirements applicable to that registered dealer under NI 31-103); or (ii) in compliance with the international dealer registration exemption in section 8.18 of NI 31-103, the CSA will consider whether regulatory action is appropriate. This would include seeking a cease-trade order in respect of the Bail-in Debt, where warranted.
CSA Staff Notice 81-331 – Bail-in implications for investment funds:
The CSA also confirms that money market funds are permitted to invest in a Bail-in Debt provided that the Bail-in Debt continues to meet the prescribed eligibility requirements applicable to money market funds as set out in subsection 2.18(1) of NI 81-102. This requires, for example, investment fund managers (IFMs) to continually monitor their investments in a Bail-in Debt to ensure such investments are in compliance with the designated rating requirements, and are generally readily convertible to cash. In addition, the CSA notes that an IFM that chooses to invest in a Bail-in Debt must fully understand the key implications of doing so and take into consideration any risks to their funds as a result of the investment, such as the risk that the CDIC may convert all or a portion of a Bail-in Debt into common shares.
Lastly, the CSA reiterates that if an IFM, or one or more of its investment funds, hold a Bail-in Debt, such holdings must be consistent with the fund’s investment objectives and strategies and be held in compliance with NI 81-102, as applicable.