CSA issues guidance on bail-in debt regime

Canadian Securities Administrators (CSA) published two notices to provide clarity on the bail-in debt regime for domestic systemically important banks (D-SIBs), which include Canada’s big six banks, and for Quebec’s Desjardins Group.

The bail-in debt regime, resulting from the 2008 financial crisis and coming into force on Sept. 23, enables a failed or failing bank to be recapitalized and remain operating.

Under the regime, if the Office of the Superintendent of Financial Institutions (OSFI) determines that a D-SIB is no longer viable, then the federal government may turn control of the D-SIB to the Canada Deposit Insurance Corporation (CDIC). As the appointed receiver, CDIC has authority to convert all, or a portion of, the D-SIB’s bail-in debt into common shares to recapitalize the bank.

Read: OFSI designates largest banks ‘systemically important’

To protect investors from risk associated with investing in bail-in debt, “registered dealers must comply with regulatory requirements, and investment fund managers must understand the risks,” says Louis Morisset, CSA chair and president, and CEO of the Autorité des marchés financiers, in a release.

CSA’s first notice addresses the distribution or trade of bail-in debt to investors, and its second notice provides guidance for investment fund issuers that may invest in bail-in debt.

Specifically, CSA Staff Notice 46-309 Bail-In Debt clarifies that bail-in debt has risk for investors, including that the debt could be converted to common shares.

The notice also clarifies that, subject to specific exemptions, the trading or distribution of bail-in debt must be done through registered dealers, in accordance with National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registration Requirements.

The second notice, CSA Staff Notice 81-331 Investment Funds Investing in Bail-In Debt, clarifies that D-SIB bail-in debt is an eligible investment for a money market fund only if the debt continues to meet prescribed eligibility requirements applicable to money market funds for capital preservation and liquidity.

The notice also outlines other requirements for investment fund managers that hold D-SIB bail-in debt, including the requirement to understand and consider key features and risks of D-SIB bail-in debt to their funds.

CSA says in the release that it will continue to monitor the bail-in debt regime and will consider whether additional guidance is needed.

Read the full notices on distribution of bail-in debt and associated guidance for issuers.

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