Ontario’s Business Law Advisory Committee, which advises the province’s Ministry of Government and Consumer Services, is proposing a compromise solution to the issue of perfecting security interests in cash collateral. As those following the cash collateral saga know, the sticking point with amending the regime to allow perfection by control (and a first priority based on control) for cash collateral has been the statutory priority that pension plans enjoy over “accounts” with respect to contributions owed by the debtor employer. As a result of the Sun Indalex case, the potential priority liability includes unfunded liabilities in defined benefit plans. The Committee’s proposed solution is to allow perfection by control for all accounts while subordinating the pension plan priority under the PPSA if and only if the obligations secured relate to “derivatives”.

While it’s easy to appreciate the need for some form of compromise, it is not going to be all that easy to implement this proposal. Among the many issues that will need to be addressed are the following:

  • How will “derivative contract” be defined? The report seems to suggest that this refers only to OTC derivatives, but futures will also have to be included.
  • Why not securities loans and repos, which also need certainty in order to qualify for capital relief? Including them would be consistent with the federal insolvency laws.
  • How will this affect rights of set-off under section 40 with respect to other types of obligations? It would be a shame if this proposal were implemented in a way that compromised the section 40 rights that should apply to title transfer collateral arrangements used in many lending markets, not just derivatives.

Comments are due by December 12, 2016. While I continue to believe that this isn’t the best way forward, at this stage it looks like it may be the only way.

Here is some of the text from the report addressing this issue:

In the area of commercial law, the Council is recommending a resolution to the stalemate on the treatment of cash collateral under the Personal Property Security Act (the PPSA). The amendments originally proposed by the Ontario Bar Association would enable security interests in cash collateral to be perfected by control, assuring secured parties first priority without the need for registrations or searches. However, one of the proposed amendments would have the effect of overriding the priority now accorded under the PPSA to pensioners and employees whose interests in deposit accounts would otherwise rank ahead of secured parties whose security interests are perfected by control. We are recommending that the definition of “account” be further amended to preserve the pension and employee priority for all deposit accounts except for those that function as collateral for derivatives contracts. In the area of commercial law, the Council is recommending a resolution to the stalemate on the treatment of cash collateral under the Personal Property Security Act (the PPSA). The amendments originally proposed by the Ontario Bar Association would enable security interests in cash collateral to be perfected by control, assuring secured parties first priority without the need for registrations or searches. However, one of the proposed amendments would have the effect of overriding the priority now accorded under the PPSA to pensioners and employees whose interests in deposit accounts would otherwise rank ahead of secured parties whose security interests are perfected by control. We are recommending that the definition of “account” be further amended to preserve the pension and employee priority for all deposit accounts except for those that function as collateral for derivatives contracts.

The PPSA should be amended to enable security interests in cash collateral to be perfected by “control”, thereby assuring secured parties a first priority security interest in such collateral. However, to address concerns expressed by some stakeholders representing pension beneficiaries, we also recommend a further amendment that would preserve the s. 30(7) priority for all deposit accounts other than those that function as "financial collateral" for “eligible financial contracts” as defined in regulations to the Bankruptcy and Insolvency Act, which definition includes most forms of OTC derivatives.