While reading the provisions of the Canada Deposit Insurance Corporation Act dealing with member institution resolution regimes is excellent brain exercise, you might prefer to read the much less challenging and newly published guidance note from CDIC. The Guidance on Exercise of Eligible Financial Contracts Close-out Rights in a Resolution Scenario very helpfully explains how CDIC anticipates that the regulatory powers of CDIC and the Finance Ministry – particularly those new powers added in the June amendments – would in practice be exercised in relation to eligible financial contracts, including derivatives and securities financing arrangements, when a member financial institution is financially distressed.
The strong message in the Guidance is that the intention of the amendments is to implement the Financial Stability Board’s Key Attributes of Resolution Regimes for Financial Institutions(FSB Key Attributes). The FSB Key Attributes require that termination rights triggered by resolution events – such as bail-in measures or transfers to a bridge institution or creditworthy third-party purchasers – be suspended so as not to compromise the effectiveness of those measures, but that termination rights otherwise be enforceable or only temporarily suspended. The part of the Guidance that best explains the overall effect of the resolution regime is the following:
In developing its recommendations on the choice of resolution approach and in executing a resolution, CDIC would be guided by its statutory objects, including promoting and otherwise contributing to the stability of the financial system in Canada, and in so doing by the FSB Key Attributes. In this regard, CDIC recognizes that the legal enforceability of close-out rights, including in the event of and by reason of any new or continued insolvency of a FI, also promotes and contributes to the stability of the Canadian financial system and, therefore, any limits that are unrelated to the resolution events on the exercise of close-out rights should be strictly limited in time (e.g., consistent with the FSB Key Attributes, for a period that does not substantially exceed two business days). Ongoing insolvency would not exist where there is a high degree of certainty that the crisis will be stabilized expeditiously through implementation of the resolution tools and measures described below. Parties to EFCs [eligible financial contracts] with the FI [member financial institution] should have, at the time of the making of the Resolution Order, confidence that their transactions will continue in place either with: (1) their original counterparty restored to financial viability through implementation of the institution’s previously prepared resolution plan (Open Bank Resolution); (2) a solvent and CDIC supported bridge institution (Bridge Bank Resolution); or (3) a credit worthy third party acquirer (Forced Sale Resolution).
One noteworthy aspect of the Canadian regime made very clear in the Guidance is that there is no stay that prevents reliance on performance defaults either prior to the making of the Resolution Order or thereafter. Also made clear is the fact that termination would not be stayed if any formal insolvency proceeding (namely a Winding-Up and Restructuring Act liquidation) were to be commenced.
Given the publication of the Guidance, now would be a good time to update your Canadian capital opinions.