Transactional issues

SPV forms

Which forms can special purpose vehicles take in a securitisation transaction?

Canada does not have specific laws pertaining to securitisation SPVs.

There are a variety of securitisation legal structures used in Canada that use a range of SPV entities (including corporations or partnerships). The most common SPV entities used in Canadian securitisations are common-law trusts and limited partnerships.

SPV formation process

What is involved in forming the different types of SPVs in your jurisdiction?

A common-law trust SPV can be formed quickly and easily (at little legal cost) using a standard Declaration of Trust document in which a settlor designates an SPV trustee. The trustee will be a licensed entity that typically will be required to meet minimum independence and credit quality requirements (see questions 5 and 23). In cases of corporate or partnership SPVs, those entities can also be formed quickly, easily and inexpensively.

Governing law

Is it possible to stipulate which jurisdiction’s law applies to the assignment of receivables to the SPV?

Matters of contract law, such as receivables purchase agreements, are governed by provincial laws in Canada. Canadian provincial laws do not require a sale of receivables to be governed by the same law as the law governing the receivables. A Canadian court should recognise the choice of a foreign law, provided that the choice of law is bona fide and there are no public policy grounds for avoiding it. However, there are a number of limitations as to how foreign law would be applied in a Canadian court, including, but not limited to, the following:

  • the court will apply Canadian provincial law to any procedural aspects of a matter;
  • the court may only give effect to foreign law if it is pleaded and proven by expert testimony; and
  • the court will apply Canadian provincial laws that have overriding effect (eg, certain provisions of the Personal Property Security Act (PPSA) in each province relating to enforcement).

Aside from recognising a choice of law, a Canadian court should recognise that a sale under foreign law is effective against the seller and other third parties in Canada as a true sale, provided that the Canadian law requirements for a true sale are satisfied (see question 33). However, while choice of law and true sale may be recognised by a Canadian court, as a practical matter, a true sale opinion is typically required for securitisations, and Canadian lawyers are only able to opine on the enforceability of a receivables purchase agreement governed by Canadian law for these purposes. For these reasons, the parties will often choose Canadian provincial law as the governing law for the receivables purchase agreement when the securitisation involves a seller located in Canada and a true sale opinion is required. Also, regardless of choice of law governing the sale, see questions 19 and 20 as to the perfection requirements for a sale of receivables located in Canada to be effective.

Asset acquisition and transfer

May an SPV acquire new assets or transfer its assets after issuance of its securities? Under what conditions?

Yes. Under Canadian law, a seller may sell to an SPV receivables that are acquired or originated by the seller after issuance of securities by the SPV. While the SPV may commit to purchase future receivables at the time of issuance of its securities, the sale is only considered to occur when the receivable comes into existence and the purchase price is paid. See question 28 as to identification. However, it should be noted that for any receivables that come into existence and are assigned following the insolvency of the seller, there is a risk that the seller or an insolvency official may validly disclaim the sale in certain circumstances.

Registration

What are the registration requirements for a securitisation?

A securitisation per se does not need to be registered. However, the perfection of the sale of receivables to the SPV and of any security granted by the SPV is achieved through registration in relevant registries (see questions 20 and 26).

Obligor notification

Must obligors be informed of the securitisation? How is notification effected?

There is no general Canadian legal requirement for obligors to be informed of a securitisation. However, in order for the sale to be effective against an obligor located in Canada, the obligor must be notified of the sale. Nonetheless, subject to Quebec law requirements for perfecting sales of Quebec receivables (outlined below), this is not typically required for Canadian securitisations. To the extent that obligors are notified, there is no specific legal form or delivery method required by law. It should be noted that if the obligors of the underlying receivables are located outside Canada, the effectiveness of the assignment against the foreign obligor would be governed by the law of the jurisdiction where the obligor was located. Notice to the obligors is not required in order for the sale to be effective against the seller and its creditors, provided that perfection requirements under relevant provincial law were satisfied in provinces other than Quebec. Instead, perfection is achieved by registration under the province’s PPSA (that deems an absolute assignment of receivables to be a security interest), by registering a financing statement in the PPSA registry. In Quebec, an assignment of a ‘universality of claims’ (ie, a sale of all receivables of a particular type generated by a seller between two specified dates) may also be perfected by registration. However, in cases of sales of receivables in Quebec that are not sales of a ‘universality of claims’, the transfer must be perfected by notice to the obligors. Special procedures must be followed to assign receivables from government obligors (see question 14).

What confidentiality and data protection measures are required to protect obligors in a securitisation? Is waiver of confidentiality possible?

The Personal Information Protection and Electronic Documents Act is federal legislation that applies to the use, collection and disclosure of personal information in Canada. Certain provinces have also enacted data protection laws. While these laws only relate to data pertaining to individuals, the definition of ‘personal information’ is very broad. Individual consents to collection, use and disclosure are possible.

In practice, caution is required in transferring, handling and storing data pertaining to consumer credit, and other receivables that contain personal information and portfolio data may need to be anonymised.

Credit rating agencies

Are there any rules regulating the relationship between credit rating agencies and issuers? What factors do ratings agencies focus on when rating securitised issuances?

In 2012, National Instrument 25-101 - Designated Rating Organizations (NI 25-101) came into force and, for the first time, subjects credit rating agencies to targeted regulation in Canada. NI 25-101 permits any credit rating organisation to apply to become a ‘designated rating organisation’ (DRO), and stipulates that a credit rating organisation must become a DRO for its ratings to be included in a Canadian offering document. NI 25-101 imposes certain requirements on DROs, including:

  • adoption and publication of a code of conduct;
  • incorporating procedures to ensure ratings are based on a thorough analysis of all available information;
  • the establishment of managerial oversight committees; and
  • various ratings of integrity, transparency, governance and independence mechanisms.

Under NI 25-101, DROs must not make a recommendation to an issuer about the corporate or legal structure, assets, liabilities or activities of the issuer, and DROs must disclose the details of compensation arrangements with the issuer. In addition, many of the credit rating agencies rating Canadian securitisations are US-headquartered or operate in the United States, or both, and, therefore, will also be subject to US regulations applying to them extraterritorially. The factors that rating agencies focus on in Canadian securitisations are outlined in their global or North American ratings methodologies for the relevant asset class (subject to adjustment for any Canadian law and market practice particularities). The Canadian rating agency, DBRS, also publishes some specific Canadian securitisation ratings methodologies based on the global and North American ratings methodologies.

Directors’ and officers’ duties

What are the chief duties of directors and officers of SPVs? Must they be independent of the originator and owner of the SPV?

The most common SPV entities used in Canadian securitisations are common-law trusts and limited partnerships (see question 15). In the case of a common law trust, the trust’s actions are carried out by the SPV trustee and, as such, there are no directors and officers of such an SPV. The chief duties and obligations of the SPV trustee are governed by the Declaration of Trust and general Canadian common law and statutory law pertaining to trustees. In cases where a corporate or partnership entity is used in a securitisation, the obligations of the directors and officers of the SPV, or the general partner of the SPV, are no different than those that would exist at law more generally (by application of Canadian common law and relevant provincial or federal company or partnership statute provisions). This includes a fiduciary duty to the corporation they serve and a duty of care. There is no specific Canadian legal requirement that the trustee or directors and officers must be independent of the originator entity. However, legal structuring and credit rating agencies’ methodologies may impose certain independence requirements (see questions 13 and 32). In the case of financial institution originators who are seeking favourable Canadian capital treatment for the securitisation, OSFI Guidelines B-5 and B-5A create capital requirement disincentives for financial institutions setting up SPVs that are not fully independent. In cases where independence is required, a provision in the company’s or partnership’s constitutional documents to the effect that certain actions may not be taken without an independent director’s approval should be legally effective, to preclude such action from being validly taken without such approval. A contractual restriction entered into by the SPV would mean that an action without such approval would be a breach of contract, but the action itself may not be invalid as a matter of corporate law.

Risk exposure

Are there regulations requiring originators and arrangers to retain some exposure to risk in a securitisation?

Canada does not have such regulations. The CSA has taken the position that the Canadian securitisation market is, for the most part, free from incentive misalignment, owing to a number of factors:

  • a large portion of the Canadian securitisation market is comprised of government-guaranteed securitised products (such as the NHA MBS);
  • Canadian securitisers are generally subject to prudential oversight; and
  • the ‘originate-to-distribute’ model is not prevalent in Canada.

Canadian securitisations also use forms of credit enhancement, which the CSA suggests achieve the objectives of risk retention:

  • over-collateralisation;
  • excess spread; and
  • cash reserve accounts that trap cash-to-pay investors.

As a result of these factors, the CSA has specifically stated that Canadian securities regulators will not be introducing mandatory credit risk retention. However, the CSA does take the position that issuers should disclose clearly to investors whether and how a securitisation has been structured to align the interests of the securitisation parties with investors, and the extent of any risk retention. It should be noted that, to the extent that the securities of a Canadian securitisation are offered to US or EU-member investors, US or EU risk-retention rules may effectively apply to the securitisation extraterritorially.