The recent trouble in the third-party asset-backed commercial paper(ABCP)market isn’t due to lax rules sanctioned by the Office of the Superintendent of Financial Institutions, said superintendent Julie Dickson.
Speaking in Montreal this morning, she said there are two ABCP markets in Canada: one sponsored by Canadian banks, which OSFI oversees, and one sponsored by unregulated players.
“ABCP vehicles sponsored by Canadian banks had either global style liquidity lines or market disruption lines in place; it depended on the bank,” said Dickson. “Despite headlines suggesting lax rules, loose rules, or different rules, Canadian rules are robust and aligned with international standards.”
For ABCP sponsored by non-banks, the situation is different. Such vehicles chose to negotiate general market disruption liquidity lines exclusively.
“When market confidence waned,” she added, “these conduits could not negotiate global style lines and were unsuccessful in availing themselves of liquidity under general market disruption lines, given disagreements over the terms they had agreed to with their liquidity providers.”
Close to 90% of the banks that these entities were dealing with were offshore foreign banks and the rules under which they operate are not set by OSFI. Canadian banks that OSFI oversees were very small in providing liquidity. Very few Canadian banks provided liquidity and when they did it was for very small amounts: a total of $1.8 billion in liquidity lines, according to OSFI estimates.
Dickson noted that it isn’t OSFI’s role to use its powers over banks to regulate capital markets. “As a prudential regulator we do not tell Canadian investors what to invest in or not invest in,” she said. “We do not tell unregulated players how to go about their business. We do not tell banks to provide liquidity to certain players and on what conditions.”
She added that Canadian investors knew they were buying ABCP with one rating and limited liquidity lines. Standard & Poor’s put out reports explaining why they would not rate a product that had liquidity lines that could only be drawn in the event of a general market disruption. It suggested that liquidity lines that were better for the investor.
“Others such as DBRS believed that general market disruption lines were sufficient given the higher level of credit enhancement in Canadian structures compared to international structures,” Dickson said. “Sophisticated investors and advisors supported the DBRS view.”
Last week, the committee created to help restructure third-party ABCP said it needed more time to reach an agreement. To read ABCP Committee Seeks Extension, click here.
To comment on this story, email craig.sebastiano@rci.rogers.com.