Canadian regulators are proposing major new restrictions on the sale of securitized financial products like asset-backed commercial paper, arguing unsophisticated investors should not be buying products that are potentially too complex and risky.
The Canadian Securities Administrators, an umbrella group for Canada's provincial securities commissions, has unveiled a host of reforms to govern the sale of securitized products, responding to calls for tighter regulation following the melt-down of Canada's $32-billion market for non-bank asset backed commercial paper (ABCP) in the summer of 2007.
Regulators said they ultimately decided on broader regulation to cover not just ABCP, but other forms of securitized financial assets for consistency of regulation across the board.
Securitized products entitle holders to receive payments from a pool of underlying financial assets such as mortgages, credit card receivables or automobile leases.
The new CSA proposals would sharply restrict the categories of investors allowed to buy securitized instruments, along the lines of other "permitted client" rules currently in place for accredited investors. It broadly includes institutional and corporate investors, as well as sophisticated individuals with financial assets worth more than $5-million.
The changes are intended to address concerns that non-bank ABCP products were sold to hundreds of unsophisticated retail investors before the market freeze-up in 2007, even though it was intended only for institutional buyers. Regulators at the time said they were unaware the product had been sold to retail clients before the market seized up.
The standards mean the CSA has opted to tighten restrictions on the sale of ABCP and related products rather than introduce an open market for the securities, which would require far stricter prospectus disclosure and regulatory requirements.
"We will work toward striking an appropriate balance between strong investor protection and an efficient, open marketplace," Bill Rice, chairman of the CSA and chairman of the Alberta Securities Commission, said in a statement.
The CSA rules will also introduce new requirements to disclose detailed information about the investments, including details about the underlying assets, relationships and potential conflicts among parties involved in creating the assets.
As the ABCP market was collapsing in 2007, investors complained they knew little about the assets backing their holdings, including whether they included U.S. subprime mortgages, and had little information about the parties who structured the securities or their interests in the products.
The CSA said enhanced disclosure is particularly important for short-term securitized products like ABCP because investors are extremely sensitive to delays in payments and expect repayment in full.
"During times of financial instability, investors who lack adequate information about the quality of the underlying ABCP program assets and any liquidity facility may indiscriminately refuse to buy new paper, which can in turn increase the risk that the market may freeze entirely and contribute to a liquidity crisis," the CSA said in a request for comments issued Friday.
Issuers of short-term securitized products like ABCP would have to post a monthly report on their web sites disclosing any change to the products or any events that could affect payments or performance of the pool of assets backing the securities.
The new rules would not include two types of securitized products. The CSA said covered bonds will be exempted because they are issued by financial securities and are secured by the institution's assets, so "do not seem to raise the same policy concerns as standardized products." Non-debt securities issued by mortgage investment entities are also excluded, but the CSA said they are being considered under a separate regulatory initiative.